Auto Leasing Expected to Rise in 2004
The new-car lease is making a comeback. A fading trend in recent years because of price incentives for car buyers and big losses for banks and automakers, leasing is expected to regain popularity this year, according to a report by the Associated Press on January 29.
Rising interest rates and a drop in the numbers of low-mileage used cars should help more customers decide to lease, analysts and industry officials say. For dealers, it should mean more showroom traffic.
The topic is sure to be a popular one at the National Automobile Dealers Association (NADA) convention that began on January 31 in Las Vegas, with more than 30,000 industry professionals attending. The gathering is where dealers get face time with the executives who run the companies that make the vehicles they sell—and lease.
For dealers, leasing is attractive because a leased vehicle counts the same as a sale in terms of profit. And a customer who chooses a two- or three-year lease is going to be back before someone who opts to buy a car using a loan with a term of four, five or even six years.
Leasing exploded in the 1990s, when automakers saw it as a way to improve profits—and ensure a steady stream of repeat business—while lowering monthly payments for car buyers.
The key to making money on leasing is estimating residual value—something that proved to be a problem in the late 1990s. Some automakers overestimated, which meant lower payments for consumers but cars and trucks worth less than their expected resale values at the end of the term. The result: massive losses for automakers, banks and leasing firms.
Losses narrowed in the past couple of years after automakers improved those estimates and tightened lease terms. For instance, they limited the length of contracts on cars that lose resale value more quickly than others.
For many shoppers, leasing lost its luster when automakers, as part of an effort to spur business after the 2001 terrorist attacks, began offering interest-free financing and large cash rebates to induce more sales—deals that continue today.
In 1998, leasing accounted for 36 percent of the new vehicle business. It fell to roughly 19 percent in 2003. It is expected to grow to 21 percent this year. More leases mean more well-tended, not-so-old cars for dealers' certified used vehicle programs, which are profitable and increasingly popular.
Paul Taylor, the NADA's chief economist, said an expected rise in interest rates this year will make purchase loan terms look less attractive and contribute to more leasing. Also, fewer people will refinance their homes, and thus have less ready cash to buy a car. Taylor also expects the improving economy to prompt some companies that stopped leasing cars for top executives during the recent recession to resume the perk.