More car shoppers deciding to lease instead of buy
Published: Sunday, June 16, 2013 at 4:15 a.m.
Last Modified: Friday, June 14, 2013 at 2:14 p.m.
Consumers shopping for a new set of wheels are increasingly choosing to lease, rather than to own, their cars.
The boom in leasing is being driven in part by fierce competition for buyers, lower monthly rates for leases and a hot used car market, experts said.
But some in the industry are concerned that with the rise of leasing, manufacturers and lenders are assuming more of the financial risk.
Dealers in Sonoma County are seeing more drivers who like to change up their high-end cars every few years and early adopters who want to keep up with the latest advances in electric vehicles.
At Silveira Buick GMC, the volume of leases has doubled in the last year, said co-owner Scott Silveira.
“People are asking about leases, because they're aware,” Silveira said. “They see the payments manufacturers are advertising on TV or in print. You can get a lot of vehicle with just a little out of their pocket.”
Nationwide, leases accounted for a record 27.5 percent of all new vehicles financed during the first quarter, up from 24.4 percent in the same period a year ago, according to Experian Automotive, which tracks data on auto sales. Just four years ago, less than 17 percent of new cars were financed through leases.
So, why do monthly payments for leases look so small?
Those monthly payments typically cover the car's depreciation and interest, but cars haven't been depreciating very much. Since used cars have been in demand and selling for higher prices, the leased cars are expected to sell for good amounts when the lease period — typically two to three years — is up. The higher the resale value at the end of the lease, the lower the monthly payment. That leaves a market where the monthly payment to lease is often cheaper than the monthly payment to buy the same vehicle.
“The manufacturers are really, really pushing for it,” said Roberto Galvez, general sales manager for Henry Curtis Ford. “Obviously to them there's a benefit of having them come back two or three years down the road. And one of the ways they're accomplishing that is with absurdly low rates.”
Bryan Eddinger, owner of Adrenaline Zone, a Santa Rosa sporting goods store, wanted to buy a BMW Z4 convertible for his business. He decided to lease, which gave him a chance to try it out before committing.
“It wound up being more affordable that way,” Eddinger said. “Instead of car payments of $600 or $700 a month, it wound up being about half of that.
“I can see why people are leasing, because if you are short on cash, you can get a nicer car for a short period of time,” Eddinger said.
Walking into a dealership, many buyers are taken in by the lower monthly cost of leasing, especially when they can't or don't want to make a large downpayment.
But there are other costs to consider. Consumers should know in advance what it will cost to purchase the car at the end of the lease. There are also fees to consider, such as title and registration fees, or an “acquisition fee” which may be charged if a customer buys a car at the end of the lease. Interest rates also vary from one deal to the next.
Edmunds.com, the auto information website, also recommends making sure the contract includes “gap insurance,” which comes into play if the car is stolen or totalled in a crash. The website includes a “basic lease calculator” which consumers can use to consider the merits of a deal.
“It really came down to the payment option at the time,” said Thomas Ford, a Windsor resident and salesman at Magnolia Home Theater, who has leased several cars and trucks. “We didn't want to pay more than what we were already paying, and the leasing seemed to be the only way to get the vehicle we wanted with that same payment option.”
As auto manufacturers adopt the latest technologies some drivers are tempted to upgrade more frequently.
Leasing can be an attractive option for professionals who work in sales or real estate who want to appear successful when interacting with clients, said Ben Stone, executive director of the Sonoma County Economic Development Board.
“Maybe some people who are leasing may not be able to afford a car,” Stone said. “You want to look good when you take your client out, but you still might be paying off debts.”
Leasing also can make sense for people who like to drive a new car every two or three years, especially electric vehicles, said Ron Coury, e-commerce director for North Bay Nissan. The monthly payments to lease a car can be much cheaper than those to buy the same vehicle, he said.
For example, to lease a Nissan Leaf SV for two years, with no downpayment, a driver could pay about $265 a month, Coury said. To buy that same car, a customer with the best possible credit score could pay about $597 a month for five years, he said.
Of course, at the end of the five years, the buyer would own the car outright, while the lessee would not. But if the car's value depreciated rapidly, and the buyer wanted to upgrade to a newer model that recharges faster, for instance, the owner may face a financial loss. The lessee, by contrast, didn't assume that risk, because he or she could return the car at the end of the lease term and upgrade to a newer model to lease.
That's what retired businessman Andrew Wolf of Sonoma County chose to do.
“I was going to buy a Ford Fusion plug-in hybrid but had second thoughts,” Wolf said. “The technology is new and unproven, so buying is a risk. On the other hand, new technology is being developed almost daily that will make this kind of car obsolete in two years.”
After considering everything, he signed a two-year lease for the car and he expects start a new lease on an updated model at the end of two years, he said.
“This is a way you can go into and out of a newer car, stay under warranty, save on repairs, and get the safest, most up-to-date technology available while spending about the same or less than if you were to have purchased the car and traded it in after four years,” said John White, vice president of Smothers European in Santa Rosa.
Many lease agreements are geared toward drivers who log 12,000 to 15,000 miles per year. If a driver clocks more miles on the odometer than the agreed amount, they're charged additional fees per mile, which can add up to a hefty sum.
“There are leases specially formatted for higher miles, but you don't get the benefit of super low payments,” Galvez said.
Drivers also can't really customize a leased car, so tinting the windows or adding stereo components and bling may be frowned upon. In addition, many drivers still prefer to reach the point where they have no monthly payments.
Some experts in the auto industry warn that a market with too much leasing can be chancy, particularly for lenders or manufacturers who take on much of the risk of loss in a lease agreement.
“Leasing is reaching new highs,” said Joe Spina, senior analyst with Edmunds.com. “It's been ramping up, and it's a little dangerous the amount of leasing that's going on.”
Those who are forecasting high resale values, known as “residual values,” may be under pressure from sales departments to predict high residual values to keep monthly payments low, Spina said. In calculating residual values, the forecasters consider things like what products the manufacturer may introduce, whether the dealerships are making investments in their facilities, and how much the cars are selling for at auction.
But predictions are just predictions, and they vary depending on who is making them, Spina said.
“There are very smart people who work for these companies, but they may be a little bit clouded with optimism, and in some cases there's good reason,” Spina said.
Meanwhile, subprime loans are increasing, and consumers within all credit tiers were able to obtain financing in the first quarter of 2013, according to Experian.
“On a purchase, any negative equity is your responsibility,” said Galvez of Henry Curtis Ford. “On a lease, any negative equity all of a sudden becomes the bank's responsibility.”
While that may increase the risk of financial losses among lenders, dealers don't seem to mind the additional business.
“We're able to get more people into cars that initially wouldn't be able to get into cars because of their creditworthiness,” Coury said. “It makes me happy. We've all had tough times.”
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