Finding a Good Deal on a Leased Car Not Easy

The days of cheap auto leasing are coming to a close.

Blame it on a lousy economy and high oil prices. Earlier this year as gasoline topped $4 a gallon, used vehicles -- especially gas-guzzling SUVs and trucks -- were suddenly selling for less than finance companies expected. That's troubling for the leasing industry since the monthly payments are based on a car's future residual value (or how much it will sell for after its lease expires).

When a consumer leases a car, he essentially borrows it from a finance company. His payments (plus a finance fee and taxes) should cover how much the vehicle depreciates over the next two or three years. If the finance companies forecast depreciation incorrectly, and the vehicles fall in value more than they expect, the banks are left sitting on cars that they can't turn around and sell profitably.

After experiencing severe losses earlier this year, a handful of finance companies, including Chrysler Financial and Wells Fargo, exited the leasing game entirely. Lenders that are still underwriting leases, like Ford Motor Credit, are lowering residual values and charging customers more to reflect the current environment. They're also offering far fewer deals on leases. Last year there were some 800 subsidized leases on the market, says Joe Spina, senior manager of remarketing for auto web site Edmunds.com. So far this year there are only 145.

These moves are not only done to ensure that the company can turn a profit on the lease -- but also to steer customers toward buying a car instead, says Joe Wiesenfelder, senior editor with auto web site Cars.com. Car makers and finance companies don't want to get stuck with a glut of leased vehicles they can't resell in a soft auto market. Instead, auto makers are throwing most of their discounts -- in the form of cash-back incentives and low interest rate loans -- at buyers.

Cars.com's Wiesenfelder says that although Ford is still leasing, the terms are so unattractive that he suspects people won't go for them.

"We know that part of the market wants to lease and we are still offering leases," says Meredith Libby, a spokeswoman for Ford. But she agrees there's probably retail financing available that may be more attractive than leasing right now.

So what does a typical lease look like in today's environment? Here's a peek at what consumers can expect to see.

Larger Monthly Payments on SUVs and Trucks. According to Automotive Lease Guide, a provider of residual value forecasts, the average residual value for pickup trucks and full and midsize SUVs fell eight percentage points over the past year. For a three-year lease on a $42,000 SUV, that translates into a monthly payment $100 higher than it was just last year.

Hefty Fees at Signing. Traditionally, the beauty of leasing was that little or no money was required upfront. Now, more leases, especially from the luxury auto makers like Acura and Lincoln, require hefty sums at signing so they can still advertise low monthly payments, says Jack Nerad, executive editorial director for Kelley Blue Book. The 2008 Lincoln MKX four-door SUV, for example, requires drivers to make an initial payment of $2,599 at signing.

Low Mileage Restrictions. Edmunds.com estimates that the average driver puts 15,000 miles on a car a year. But more lease deals in the luxury segment are restricting folks to just 10,000 miles a year. Customers are then charged around 20 cents for every mile that exceeds the limit, which could cost them an extra $1,000 a year. By keeping the mileage allowance artificially low, the financing company is able to boost the residual value and charge a lower monthly payment, says Edmunds.com's Spina.

There are a few remaining deals for those drivers who still want to lease a vehicle. But the majority of subsidized leases (the ones that carry incentives and have artificially low monthly payments) are for specific models dealers have trouble selling, like the BMW 7-series, a make too pricey for many cash-strapped consumers. Monthly payments for this sedan are $40 cheaper than last year. Consumers can find a list of all vehicle incentives on Edmunds.com and Kelley Blue Book's web site kbb.com.

Finally, leasing a subcompact or hybrid car could turn out to be a smart move. Right now the residual values for these vehicles are high so lease payments are still pretty cheap. But in the off chance that gas prices come down and drivers abandon their fuel-efficient cars, it could actually be tough to sell one of these in three years, says Spina. Still, should the residual values for subcompacts fall, the driver gets to walk away from the vehicle and the finance company gets stuck trying to resell the car.