Car leasing is now going through a surge in popularity, recovering from its sharp decline during the recession. Leasing is now at a near-record high, with slightly more than one in four consumers choosing this method for financing their car. But shoppers should be alert to some of the new trends so they can arrange a lease that best suits their budget. These include shortened lease periods of only 24 months, lease specials with low monthly payments and fewer miles included in lease contracts.
Many consumers prefer car leasing because it offers lower monthly payments and less cash up front. Few consumers fully understand leasing, however, and they can lose sight of the true expenses. To navigate the process, read "10 Steps to Leasing a New Car," which also describes the lease-vs.-buy decision.
Car shoppers can be drawn to leases because of very low advertised monthly payments. However, lease payments are actually a product of four important factors that consumers should keep in mind: 1) length of the lease in months, 2) the number of miles included, 3) drive-off fees and 4) interest rate. Many shoppers don't understand that changing any one of these factors affects the monthly payment. Additionally, leases typically allow 12,000 miles per year of driving (or a total of 36,000 miles for a three-year lease). If a driver exceeds this mileage limit, he typically pays a penalty of 15 cents per mile. Yet if the driver travels fewer miles, he gets nothing back.
With car leasing on the rebound from a low of 12 percent of financing deals in August 2009 to 26 percent as of March 2011, consumers will see more leasing ads and can expect to be offered more lease deals from manufacturers. For example, finance giant Ally (formerly GMAC), which provides financing for General Motors and Chrysler vehicles, wrote only $200 million in leases for the fourth quarter of 2009, according to spokesman Steve Kinkade. During the same period in 2010, it wrote $1.4 billion in new leases.
Here's more on what consumers should expect when they're shopping for the right lease, according to Edmunds leasing data:
The renewed popularity of auto leasing doesn't surprise John Sternal, vice president of marketing for LeaseTrader.com, a company that helps people exit lease contracts early by matching them with someone willing to take over their contract. He says that there's so much interest in leasing currently that his company has four times more people wanting to take over leases than people wanting to give theirs up.
Sternal says leasing picked up as soon as the credit markets began to stabilize. He saw transactions on LeaseTrader climb from 60,000 in 2009 to 75,000 in 2010. Of course, some of the increased business is due to consumers who are drawn to the very short leases they can get by taking over the remaining term of someone else's contract.
Car leasing has become more appealing recently for at least two reasons, says Tarry Shebesta, president of LeaseCompare.com, which provides information and price quotes for leased-car shoppers. Leasing protects consumers from sudden dips in resale value, such as the big hit that SUVs took during the gas price spike of 2008. Also, the popularity of vehicle history reports means that any accident — no matter how minor — can kill resale value. Leasing protects consumers from poor resale values in both cases, he says.
The low-mile leases that have popped up recently can be good for consumers "as long as you know what you're getting into," Shebesta says. He described them as an effort by manufacturers to provide financial flexibility and cites Mercedes-Benz, which has a 7,500-miles-per-year lease on some of its models.
As the economy recovers, manufacturers are offering more lease specials that encourage shoppers to lease rather than buy. These specials — sometimes called "subvented leases" — are low-cost programs where the lease formula has been retooled to attract customers. Kinkade said Ally currently offers incentivized leases in the U.S. on 21 GM models and 15 Chrysler models.
One place that consumers can't expect to find subvented leases during the next few months will be among Japanese automakers, which are pulling back their incentives (including subvented lease deals), in the wake of production cuts forced by the March 11 earthquake and tsunami in Japan.
New leasing developments notwithstanding, the basics are unchanged. Experts recommend these tips for people considering a car lease:
