Auto leasing finds new lease on life

Roland Jones • Profile • E-mail

Winter is nearly over and the unofficial start of the spring car-buying season is already underway, when automakers roll out deep discounts and other incentives designed to lure car shoppers into showrooms.

General Motors got the ball rolling last week when the auto giant launched its version of “March Madness,” a promotion named after the annual men’s college basketball tournament. GM is offering car buyers up to $1,500 cash back per vehicle in an effort to rid itself of inventory sitting in dealer lots for at least three months.

Other big automakers are expected to roll out similar incentive programs, but some of them may fall on deaf ears. While Americans are still buying automobiles, car leasing is growing and it’s likely to be a popular way shoppers snap up a new vehicle this spring, analysts say. A confluence of factors, such as rising car loan rates and more stable pricing trends in the used automobile market, is returning automotive leasing to favor once again.

Indeed, the latest data from the Power Information Network, a division of marketing information services firm J.D. Power and Associates, show leasing for retail vehicles rose to its highest level in nearly four years earlier this year.

From December 2005 through February 2006, leases made up over 21 percent of new vehicle transactions in the United States — the highest level since April 2002, according to Power. In February, leases accounted for 23.2 percent of new vehicle transactions, up from 19.3 percent in the same month one year earlier and 15.2 percent in February 2004.

“We are not back at the highs we saw in 1997, so I think there’s still a lot of room to grow here,” said Randall McCathren, a leasing consultant at Bank Lease Consultants in Nashville, Tenn. “We have some of the same factors that pushed people toward leasing automobiles in the mid-90s coming up again — that’s higher interest rates and the residual values of vehicles increasing, which lowers your monthly payments.”

Auto leasing is becoming popular again after a period of excess in the industry according to Dave McKay, director of auto finance and insurance for J.D. Power and Associates. In the late 90s, lessors were overly aggressive with their lease programs, he said, so when all the cars came off lease a few years later they flooded the market.

“It’s the basic economics of higher supply, lower price. Leasing companies lost money and banks jumped out of the leasing market,” McKay said. “So the industry got more disciplined and now there are fewer vehicles around, so prices are going up again.”

However, McKay notes that the market may become glutted again if leasing becomes overly popular. “This mustn’t go too high,” he said. “When we get to about 25 percent of car customers using a lease to acquire a car, we’ll be close to a breaking point,” he added, noting that car companies need to judicious when offering leases. “You don’t want leases on cars that will depreciate tremendously — you have to be selective,” he said, adding that this does not necessarily apply to the luxury car segment, where leasing has always been fairly popular and vehicles tend to hold their value well over the years.

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