Auto Makers Hit the Brakes on Leasing Programs

STRUGGLING AUTO LENDERS are seeking a new lease on life — one that doesn't include leases.

The credit crunch, soaring fuel prices and a precipitous drop in the values of SUVs and trucks has created a perfect storm of bad news for auto makers' leasing units. GMAC — one of the largest auto financing outfits in North America — informed General Motors (GM) dealers Tuesday that it will no longer extend leases to consumers with poor credit and will stop offering leases entirely in Canada. The news follows an even more shocking announcement from Chrysler last Friday that its financial arm was pulling out of the leasing business altogether. (Wells Fargo (WFC) made a similar announcement the same day.) And Ford (F) recently announced a $2.1 billion write-down as a result of its unprofitable leases.

Long a lucrative business for auto-financing firms, the leasing business has come to a screeching halt. The problem? While lenders were first arranging leases more than a year ago, they had no idea how far the value of SUVs and trucks would plummet. (Resale values for large trucks dropped 12% over the past year; SUVs, 11%, according to J.D. Power & Associates.) Now, as leases expire, lenders are stuck with difficult-to-unload vehicles that offer little value, says Jack Nerad, executive editorial director at Kelley Blue Book. "Multiply [the loss in SUV and truck values] by the number of leased vehicles out there, and that's a substantial loss," he says.

For Chrysler, which boasts an extremely truck-heavy lineup, pulling out of the leasing business makes sense, explains Tom Libby, senior director of industry analysis for J.D. Power & Associates. For other auto makers, however, a similar move is unlikely. "Leasing is a substantial part of the business, so they won't back out unless they absolutely have to," he says. Instead of abandoning its leasing business, Ford, for example, is actually raising prices for new truck and SUV leases.

The good news is that those currently holding a Chrysler lease or shopping for a Chrysler, Dodge or Jeep may actually be in luck (especially if they have good credit). Here's how recent changes in the leasing business will impact consumers:

Better lease deals for those with good credit

New leases accounted for 20% of Chrysler's business, according to J.D. Power & Associates. That's a lot of potential lessees for banks and other financers to fight over, leading to some good deals for Chrysler customers, says Michael Kranitz, owner of Lease Wizard, a lease rate information site. In fact, consumers with a solid credit score of 700 or more may be able to get better terms through third-party lenders than they would through the dealership, which can pad in-house lease terms. (Read our story The Showroom Shuffle to learn more). To get the best deal, shop for leases through several lenders, as if it were any other loan.

Another bonus: Chrysler will offer incentives to dealerships that help place new customers in leases with outside lenders. That means dealers should be more willing to negotiate on customers' behalf.

Bad credit? Bad luck

"If you have less-than-perfect credit, you have much less chance of getting approved for a Chrysler vehicle," says Jesse Toprak, executive director of industry analysis for auto information site Edmunds.com. To move cars off the lot, auto makers often subsidize the cost of leases by overestimating residual value (the car's value at the end of the lease) or artificially lowering the interest rate to take on some of the cost themselves. Outside banks, on the other hand, couldn't care less about vehicle sales. They want to make money on the lease, and therefore won't take on more risk than necessary, says Toprak. For car buyers with a credit score of less than 700, that means less-favorable rates and, in some cases, the lender may not work with you at all.

More purchase incentives

Now that leases are out of the picture for Chrysler, the auto maker plans to focus more on auto loans, offering purchase and financing incentives. First up: extending its 0% financing for 72 months deal to include several more models. Do the math and, in some cases, those incentives make it more affordable to buy the car than to lease it.

Leverage to buy at end of lease

"Some of these [currently-leased vehicles] are going to be worth much less than they are on the books right now," says Libby. Ford, for example, reported that its average auction price for vehicles returning from a 24-month lease was $2,700 lower in the second quarter than it was during the same period last year. To avoid such losses, dealers will be more willing to negotiate on price and financing terms with leaseholders whose contract expires. Dust off those bargaining skills, and you could get a gas guzzler for a song.

Also See:
5 Cheap Ways to Make a Car More Fuel-Efficient
Car Buying in a Credit Crunch
How Car Buyers Can Land the Elusive 0% APR