Leasing loses its lustre in market turmoil

Plummeting residuals means cash is king for many automakers.

There’s been a lot of speculation over the past nine months about automobile leasing going the way of the dodo, but in reality, leasing – preferred by the majority of new-car shoppers a decade ago – is still garnering a considerable slice of the Canadian car market.

While it’s true General Motors and Chrysler have dropped their leasing programs, every other manufacturer is still in the

game – although some would rather not be.

Auto broker Mark Derry, of CarSense.to, believes lease deals are definitely more expensive than last year and some automakers are dissuading customers from leasing.

The reason? Plummeting residuals – the remaining value of the car at the end of the lease – are playing havoc with profitability.

“Companies are terrified of the market and don’t want to lose on lease returns,” Derry says.

Leased vehicles (especially gas-swilling SUVs) are frequently worth less at the end of the contract than predicted, leaving the automaker’s finance arm to absorb the loss once the vehicle is sold at the present, lower market value.

Even vaunted nameplates aren’t immune to falling residual values, leading to higher lease payments than Canadians are accustomed to.

“Strong residuals among popular Japanese models are down 4 to 5 per cent,” Derry says.

“Toyota has slipped from 48 per cent retained value after four years to 42 per cent – that means the customer has to pay more of the vehicle’s value over the first four years in their monthly payment.”

Some automakers, especially the luxury brands, continue to advertise attractive lease rates, says Derry, because the prime rate companies pay is at a historic low.

Given the stark economics of leasing, it’s no surprise leasing has taken a back seat to financing.

Chris Travell, vice-president of Maritz Research Automotive Group, says automobile leasing in Canada has plunged from a peak of 54 per cent of all new-car transactions in 1999 to 42.5 per cent in 2005 and just 32.3 per cent in 2008.

“I wouldn’t be surprised to learn leasing has fallen below 30 per cent of new-car sales right now,” says Travell. “The credit crunch has accelerated the drop in leasing.”

Some automakers stipulate punishing lease rates to deter consumers and to cover future losses.

“Ford is offering some lease rates at 11 to 12 per cent, which is far too expensive,” says George Iny, president of the Automobile Protection Association.

On the other hand, luxury-car makers such as Mercedes-Benz and Audi advertise very competitive rates because their primary market is lease customers.

Leasing had always found favour with cash-strapped Canadians because the monthly fee is smaller than a loan payment.

But you’re essentially renting; the leasing company owns the vehicle and at the end of the term you have to return the

vehicle or buy it.

Today, most manufacturers would rather you go straight to the financing desk – assuming you’re not paying cash, which fewer than one in five Canadians do.

To help make financing more palatable, automakers spread the purchase price over 72, 84 and even 96 months so that the monthly outlay more closely resembles a lease payment.

According to the APA, seven- and eight-year car financing is a risky proposition for most consumers, especially with domestic vehicles that depreciate quickly.

For the first five years, the buyer will be “upside down” on the loan; that is, he or she will owe more on the loan than the vehicle is worth.

Selling the car during those first five years is a losing proposition, just as it is in leasing – although there is “gap insurance” to cover some situations, such as unexpected job loss (see sidebar).

The present spate of advertised leasing and financing deals has presented consumers with a dizzying array of choices that is hard to assess. Iny says there’s been no enforcement by provincial regulators over carmakers’ misleading ads.

Weekly and bi-weekly payment quotes, rather than the standard monthly quote, make the cost only appear lower. And very large rebates are often not applicable to most of the vehicles in the ad.

Among the brands with better advertising identified by the APA are Hyundai and Toyota, whose information is judged to be more complete and better understood.

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Apr 22, 2009

MARK TOLJAGIC

The Toronto Star