Car lease's scarce as Big 3 pulls out

Ford is still leasing, but pulling back significantly in writing truck and SUV leases.
GMAC is tightening leasing underwriting standards, meaning fewer customers will qualify for leases.

In the short term, these moves may help limit Big Three losses on leasing, although some question whether limiting customer's options is ultimately a good idea.

"Consumers are looking for more flexibility and options in terms of acquiring vehicles, so this seems like a hasty decision on the part of the Big Three," says Brad Neigel, a senior analyst with Aite Group in Boston. "Ultimately, by offering fewer options, they could be driving customers away."

This doesn't mean that you won't be able to lease a car, SUV or truck from local General Motors, Ford or Chrysler dealers. Big Three dealers will continue to offer lease financing, but on a less attractive basis. Foreign carmakers have no such constraint and will likely offer a full range of leasing options, but haven't historically offered as much of a discount on leases as the Big Three.

And banks, already reeling from subprime mortgage losses, are also taking hits on falling residual values. Among large banks, Wells Fargo & Co. is exiting the leasing market, and Chase Auto Finance will no longer write leases for Chrysler models. Many banks and credit unions are still writing leases, but are generally tightening underwriting standards.

Buying vs. leasing dynamics
While leasing grew in popularity during the past 10 years, only about 20 percent of all drivers lease, with the other 80 percent buying cars. This ratio could tilt further toward buying as leasing terms grow less favorable and buying terms grow more favorable. The only hitch is that the lowest payments will generally be on long-term loans, in which buyers are likely to owe more than their car is worth for most, if not all, of their loan period.
To make loan payments comparable to leasing payments, lenders are likely to further extend terms, says Bill Vogeney, chief lending officer at Ent Federal Credit Union in Colorado Springs, Colo. However, this strategy is likely to backfire in the long term, as borrowers will be "upside down" on their cars longer, forcing them to hold on to their cars for a greater period of time than they normally would, he adds.

This leads consumers to then turn to financing companies to roll over the debt from the extended loan on their old car loan into a new loan for a newer car, says Neigel, which is already happening in some cases. While this strategy can get you in a newer car, it's not a great idea, because you continue to make payments on an asset that is worth less than you owe.

Nerad expects financing companies to unveil additional creative financing options, which could include balloon payments at the end of a low-payment loan period or a change in leasing terms that would leave buyers on the hook for a drop in residual values rather than the leasing companies.

"If you're offered an unconventional financing arrangement, read the fine print and beware," he says.

Other incentives will also be on the table, such as larger initial discounts and cheaper gas, as is the case with a recent Chrysler incentive offering $2.99 gas for three years when buying qualifying vehicles, notes David Thomas, a senior editor with Cars.com. Car manufacturers are attracted to these incentives because they can quantify the cost better than the future value of a car coming off lease.

Finding a lease
Die-hard car leasers fall into two camps: those who want a new car every two or three years and those who want a low payment. You may be out of luck on the low-payment front, but if you still want to lease so you can avoid maintaining a car, you can find financing, especially if you have good credit. Also, better leasing deals may be available on smaller cars that are more likely to hold residual values, says Scott MacMillan, a commercial representative for Nielsen Automotive Group in New Jersey.

Going forward, the best strategy to find a competitive lease arrangement is to shop around for the best lease terms before you walk into a car dealer, just as you would shop around for a loan commitment, Nerad says.

"A wide variety of national and regional financing companies, banks and credit unions are still offering leases and you can shop online for terms in many cases," he says.

However, the lease financing market is not likely to expand beyond the players that are currently involved due to the expense and uncertainties of the leasing business, notes Neigel.

"Many big banks have never made much money on leasing, and starting a leasing business is a difficult endeavor," he says.

Another option is lease-trading sites, such as LeaseTrader.com and SwapALease.com, which are companies that serve as intermediaries between consumers who want to get out of a lease and those seeking to get into one. Many financing companies and car dealers also offer vehicles for lease on these sites. For more information, check out "Breaking a Car Lease just got easier."

The Big Three eventually might reverse course and re-enter the leasing market.

"We've certainly seen auto manufacturers reverse course as the market shifts in one direction or another," says Nerad. "The Big Three's desire to stem losses on vehicle leases may be less compelling than their desire to sell cars in the future."