Deals on Wheels : Auto Industry Sees a Major Shift to Leasing
Experts call it a fundamental shift in consumer behavior:
More and more new car customers are leasing rather than buying a vehicle outright or financing it over several years.
A broad spectrum of motorists no longer thinks it is important to own the car one drives--a development akin to homeowners saying it is all right to rent.
The American Dream may never be the same. “We are seeing a major cultural change,” said George Reganis, director of leasing for General Motors Acceptance Corp., GM’s financing unit.
Although leasing has been an option for decades, it mostly was relegated to luxury cars or business use.
Today, though, drivers of pickup trucks, sport utility vehicles and subcompacts are as likely to lease as executives who prefer higher-priced cars. Even used cars can now be leased.
One of every four cars “sold” to individuals in the first half of this year was leased. The ratio could reach one in three in a couple of years, and perhaps one in two by the turn of the century, some experts predict. (Detroit counts leases as sales; technically, the dealer sells the car to the finance company, which then leases it to the customer.)
This move into the mainstream has been spurred by innovative terms--leases running for just two years, deals requiring little or no money down and affordable monthly payments.
“The trend is not likely to abate any time soon,” said Art Spinella, president of CNW Marketing Research, who monitors leasing activity from his office in Bandon, Ore.
President Clinton’s economic program is likely to boost leasing, he added, because higher taxes for the affluent will put more pressure on their disposable income and making it more difficult for some people to buy cars outright.
As with many automotive trends, California has been a pacesetter. In some areas, such as Orange and Marin counties, about half of all new vehicles are leased.
Leasing’s coming of age is comparable to that of home equity loans. Although home equity loans were available for 30 or 40 years, it was not until the boom in California housing values in the 1970s that they came to be widely used. Their popularity then slowly spread to the rest of the country in the ‘80s, as their benefits became better understood and recognized.
“Leasing has reached that same stage of general consumer acceptance,” said Randall R. McCathren, executive vice president of Bank Lease Consultants in Nashville, Tenn. “It has reached a critical mass.”
Consider John and Judy Maczko of Washington, Mich., 30 miles north of Detroit. They have leased three cars and two pickup trucks in the last four years.
And they have no intention of owning a vehicle ever again.
“We find it cheaper and easier,” said Judy Maczko, 36, who sells eyeglasses. “We are both busy. We don’t have to worry about tires and brakes, the things that go wrong after two or three years.”
She drives a Ford Escort subcompact, and her husband has a Ford Ranger pickup. Their monthly payments, after small down payments, are $269 and $139.
“The constant monthly payment can be rough,” Maczko said, “but we still feel like we own the vehicle. And at the end of two years we just get a new one.”
Not everyone is a convert. Older people who have owned a car most of their lives are the most reluctant, believing leasing is only for the wealthy or business executives.
And, some areas of the country--such as Texas, with its anti-bank tradition--are very skeptical of leasing. Some dealerships remain wary, despite auto makers’ efforts to inform them of the advantages.
In Sepulveda, Calif., Galpin Ford is trying to counter the resistance by educating its sales staff and potential customers on the ins and outs of leasing deals, said David Krier, director of leasing and financing.
“Some people are still apprehensive about leasing,” he said.
Industry officials say the rising popularity of leasing is being driven by several factors: Car prices are rising faster than incomes; improved quality is keeping cars on the road and buyers out of showrooms longer; competition for the consumer’s extra dollars as new things to buy--such as home entertainment gadgets--become more enticing.
To cope with these forces, car manufacturers have had to come up with ever-more clever marketing schemes. Rebates and incentives worked for a while, but many buyers suspected hidden costs in the sticker price.
So the auto makers have turned to short-term leases, a move credited with helping to spur a surge in sales of cars and pickup trucks this year even while consumer confidence is low and the economy remains lackluster.
“Everybody is a winner--the customer, the company and the dealer,” said Gail Duncan-Campagne, president of Jerome Duncan Ford in Sterling Heights, Mich. She said that about 60% of her dealership’s sales so far this year have been leases.
Leasing usually requires only a modest down payment and monthly payments that are lower than installments on a sale contract. The buyer bears no risk of depreciation and pays only for use of the vehicle for the term of the lease.
If the car’s value falls more than expected the lessee walks away no poorer; if the car’s value rises the lessee may opt to buy it or negotiate a higher trade-in for a new car.
Sheryl and Clem Ciluffo leased a Ford Aerostar in 1991 and plan to turn it in in June, probably in exchange for another minivan from the same dealer. In February, they traded in a Ford Tempo and leased a new Probe.
“We can’t say anything bad about leasing,” said Sheryl Ciluffo, 38, a medical billing clerk who lives in Farmington Hills, Mich.
Such unbridled enthusiasm is not universal, however.
W. James Bragg, a Long Beach, Calif., marketing consultant and author of “In The Driver’s Seat,” a book about car buying, warns that dealers and manufacturers like leasing contracts because they can make more money on them.
“Most people are not very adept at negotiating a lease,” he said. “The dealer can move many pieces under a shell.”
A lease can be structured to place a customer in a car he or she could not afford to buy, for example. That helps the manufacturer, because higher-priced vehicles usually yield higher profit margins, Bragg said.
Also, consumer protection officials in several states have sued auto makers and dealers for deceptive advertising, particularly ads for longer-term leases. The ads emphasize low monthly payments--and mention the hefty down payments required only in the fine print.
Abuses aside, leasing offers dealers and manufacturers a way to move more cars than they otherwise might. A study conducted by CNW Marketing found that 63% of those who leased would not have considered buying a new car if leasing had not been an option.
Leasing also builds customer loyalty. Since the lessee must return the car to the dealer when the lease expires, the dealer has the first shot at selling the customer a new vehicle.
Spinella said that only about 20% of all car buyers purchase their next car from the same dealer, but the proportion is nearly 80% of those who got their vehicles using a short-term lease.
“It brings people back,” he said.
Ford--the most innovative and aggressive of the Big Three in leasing--said its research shows most car buyers want a fresh vehicle every two or three years, but as car prices rise and contracts stretch out to five years, many people find they owe more on a car than it is worth after three years of use--just when maintenance costs begin to go up.
“When it is time to get rid of the car they are mad at the brand and the dealer,” said Krier of Galpin Ford. “(Selling) adversely affected brand loyalty. Leasing turns that around.”
For the auto makers--and their financing arms--the gamble in leasing is whether a car will be worth its “residual value,” or estimated resale value, when it is returned by the lessee.
If it is, then the auto maker resells the used car at a profit and, indeed, everybody is a winner. If it isn’t, the auto maker swallows the loss.
This risk has prompted some Wall Street analysts to question the wisdom of aggressive short-term lease programs. The auto makers, they say, are grabbing short-term gains and will be hurt when used-car prices fall.
“There is always a risk in leasing--that you are making a guess on what the used-car market will be in two to three years,” said David Healy, analyst for S. G. Warburg. “They are winning that bet right now, but who knows, down the road?”
Another analyst, Jack Kirnan of Salomon Brothers, has criticized Ford for its growing reliance on leasing. He recently canceled a “buy” recommendation of Ford stock because of concerns about the company’s leasing exposure.
Ford officials, however, say they are being very conservative in figuring resale values.
“I think Wall Street is ignorant of leasing,” said Ross Roberts, vice president and general manager of the company’s Ford Division.
The key to the financial success of leasing is the used-car market, which is roughly twice as big as the new-car market. Sales of used cars have been strong, with prices firm and demand high for good cars--those two or three years old with less than 30,000 miles and just one previous owner.
In other words, just the kind of cars that will be coming back at the end of the two-year leases.
Many dealers can’t wait to get their hands on these cars, since profits on used vehicles are much higher than on new ones. (The National Automobile Dealers Assn. says it is used-car sales that keep most dealerships afloat.)
Chris Cedergren, an analyst at AutoPacific Group in Santa Ana, says the auto makers must come up with a nationwide distribution program for these formerly leased cars, so that particular regions are not flooded with thousands of two-year-old vehicles.
And some manufacturers are looking even further ahead. “They are looking at leasing for the life of the vehicles,” he said, “perhaps leasing a vehicle three or four times before scrapping it.”
Ford is testing a 12-year lease program in Las Vegas. The plan gives the lessee a new car every two years, and the monthly payment does not change as long as the consumer stays with the same model. At the end of the 12-year period, the customer can keep the last vehicle for no extra charge.
Some dealerships also are getting into used-car leasing. GMAC earlier this year announced it would finance used car leases for GM dealers. Ford and Chrysler also are looking at the market.
“We want to get into used-car leasing,” said Duncan-Campagne of Jerome Duncan Ford. “We see no limits to leasing.”
The Lowdown on Leasing
One in every four cars acquired by individuals now are leased, not purchased. Some experts predict the proportion will increase to one in three by 1997 and one in two by 2000.
Car leasing is gaining in popularity . . .
Leases as a percentage of U.S. retail car sales (excluding fleet, government and business-use vehicles) ‘93: 26.4%*
* Jan.-June
. . . and nowhere more than in California.
California has been a leader in leasing, with affluent Orange and Marin counties the most active areas. Leases as a percentage of U.S. retail car sales (excluding fleet, government and business-use vehicles)
Market area 1984 1988 1992 1995* Marin County 26% 44% 57% 66% Orange County 32% 46% 48% 55% New York City 17% 25% 32% 40% Atlanta 11% 18% 22% 36% Detroit 6% 12% 17% 21% Chicago 5% 10% 16% 19% Boise, Id. 2% 8% 13% 17%
* Estimate
Source: CNW Marketing/Research
To Buy or Lease?
The economics of leasing--if the deal is carefully negotiated--often can prove advantageous. What follows is a comparison of the costs of leasing vs. buying a 1993 Cadillac Seville.
The first two years
Buying Leasing Suggested Retail Price $39,388 $39,388 Actual Sales Price $35,505 $35,955 Downpayment -2,193 -2,193 Subtotal $33,312 $33,762 Tax (6%, for illustration) +2,130 +132**** Total Amount Financed $35,442* $33,894** Monthly Payment $753 $571 Total Payments $18,073 $13,712 After 24 Months
Savings from a Lease: $4,371
The next three years
If the leased car is purchased after 24 months, the costs for the next three years are slightly higher. But over the full five-year period, leasing offers significant savings.
Buying Leasing Sales Price $23,239 Tax (6%) 1,394 Total Amount Financed*** $24,633 Monthly payment $753 $795 Total Payments $27,109 $28,615 After 36 Months Total Payments $45,182 $42,327 After 60 Months
Savings from a Lease: $2,856
* 60-month term, at 10% interest
** 24-month term
*** 36-month term, at 10% interest
**** Tax paid only on down payment
Source: General Motors Acceptance Corp.
Extra Pickup
Luxury cars historically have dominated the leasing business. But now, more buyers of less expensive cars and light trucks also are opting for leases.
Leases as a percentage of U.S. retail car sales (excluding fleet, government and business-use vehicles)
Vehicle category 1984 1988 1992 1995* Luxury 35% 47% 62% 80% Luxury specialty 15% 18% 29% 40% Full-size 11% 14% 20% 28% Intermediate 8% 11% 18% 23% Compact 3% 7% 17% 21% Compact specialty 9% 13% 16% 22% Light trucks 6% 9% 14% 25% Subcompact 0% 3% 7% 10%
* Estimate
Source: CNW Marketing/Research
