Even the car shopper who haggles like a pro probably will pay more to buy a $15,000 Honda Civic than a $12,000 Ford Escort.
On the other hand, you don’t need a lot of negotiating skill to lease the Civic for less than the Escort.
Comparing figures from Chicago-area dealers and car companies on current lease programs, typical payments on a two-year lease are about $208 a month on the Civic versus around $260 a month for Escort, even with a $1,000 rebate from Ford Motor Co.
Similarly, the Nissan Maxima GXE, with a manufacturer’s suggested retail price of $23,719, is about $2,500 more expensive than a Chrysler Concorde. But on a three-year lease, the Maxima costs $270 a month versus $325 for the Concorde.
A Chevrolet Lumina midsize sedan priced at $19,380 comes with a $750 cash rebate, giving it a $1,718 price advantage over the Toyota Camry LE, which has no rebate. Yet, Toyota says the Camry leases for $277 a month, about the same as the Lumina under similar three-year terms.
All the comparisons are based on 12,000 miles a year, and none includes sales tax, license and title fees, or other fees that can increase the monthly lease payment.
How does a car that is more expensive to buy become less expensive to lease?
“There simply is not a direct relationship between the retail price and the lease payment,” said Sandy Silverman, owner of Steven Todd Leasing, a leasing broker in Northfield. “The most critical component is the resale value.”
The resale value–or residual value in leasing terms–is set by the leasing company when the lease is signed, and it predicts what a vehicle will be worth at lease-end. Because most of a lease’s cost covers depreciation, the less a vehicle depreciates, the less it will cost to lease.
“The higher the resale value, the lower the depreciation,” Silverman said. “And the lower the depreciation, the lower the monthly payment.”
Silverman, who leases all brands of cars, compared three-year leases on the Accord EX and Camry XLE, both of which are priced around $23,000, to a $20,000 Ford Taurus GL.
Despite their higher prices, the Accord matched the Taurus at $300 a month and the Camry was lower at $290, according to his calculations.
The Automotive Lease Guide, based in Santa Barbara, Calif., has been compiling residual values for 33 years, and it is the most widely recognized source for this information. Most car companies regard it as the industry standard.
Residual values published in the current Automotive Lease Guide show that after two years an Escort will be worth 51 percent of its original price, or about $6,120 at wholesale or trade-in value. By contrast, the Civic LX will be worth 63 percent of its original price, or $9,450. After three years, the Camry will retain 58 percent of its original price, according to the guide, and the Lumina 47 percent. For Maxima the residual is 48 percent and on Concorde it is 45.
The guide publishes wholesale, or trade-in, residual values (which are lower than retail values) six times a year. Retail value is what the consumer will pay to buy a car at the end of a lease under the “option to purchase” clause.
The purchase price of a Civic LX after two years is $11,284, 75 percent of the original price. By contrast, the price of an Escort sedan is about $6,750, or 56 percent of the original price.
Doug Aiken, publisher of Automotive Lease Guide, said there is no question that higher resale value translates into lower lease payments, adding, “That is where depreciation really makes a difference.”
The guide determines residuals by looking at the historical resale value for a model and its main competitors, how it is currently priced, where the market seems headed and other factors. “It ultimately becomes a very educated guess,” he said. “And we’re not kidding anyone. It is a guess on our part. But we’ve been doing it a long time, and we have a history of accurate predictions.”
Besides resale value, the other main component that can affect lease payments is the interest rate, Aiken said. “If two cars have the same residual value, and one has a higher payment, they’re charging you higher interest.”
Art Spinella of CNW Marketing Research, a Bandon, Ore., company that tracks leasing trends, says Japanese brands such as Toyota and Honda are capitalizing on their higher resale values compared with the domestic Big Three.
“Because their resale value is so much better, they can have better lease programs,” Spinella said. “That’s what gets missed in a lot of leasing discussion, the used-car values.
“There is a really strong market for used Civics and Camrys. A 2-year-old Camry probably stays on a dealer’s lot a day or two. An Escort or Taurus may sit on a lot a couple of weeks. There are just so many of them out there.”
About 3.7 million, or 28 percent of the 15.1 million cars and light trucks sold in 1996, were leased, and Spinella said Ford leased more than any company. Ford would not disclose the number of vehicles it leases except to say it is 25 percent of its retail (as opposed to fleet) sales last year.
To some extent, Ford is a victim of its own success. The company sold 401,000 Tauruses last year, capturing the top car sales spot for the fifth year in a row. Fleet customers, such as daily rental companies, buy 45 percent of the Tauruses, and fleet vehicles usually end up on the used-car market after one year, Spinella said. With those coming off two-year leases, far more used Tauruses are available than Camrys or Accords, which do little fleet business. So, Taurus retains about 52 percent of its value after two years, well below either the Camry or Accord, according to the Automotive Lease Guide.
Supported by high resale value, Japanese brands are cutting a larger slice of the leasing pie. They did 30 percent of the leasing business in 1996, said Spinella, and their share has grown to 38 percent this year.
The Japanese car companies aren’t alone in taking advantage of high resale value to promote leasing. This year, General Motors’ Saturn subsidiary introduced its first national lease program. “We have the strongest residual value in the industry,” spokesman Greg Martin said, a point others in the industry might argue. “That has allowed us to offer a very competitive lease.” The Automotive Lease Guide backs Martin up, showing Saturn with the highest resale values among small cars. Its values are exceeded only by larger cars, such as BMW, and light trucks, such as the Chevrolet Suburban.
Since the national program was launched in the spring, Saturn’s leasing business has increased to more than 15 percent of sales from less than 12 percent. Martin predicted it could climb to 20 percent.
Used-car prices alone don’t dictate retail residual values. Car companies can pump up the retail residual values to lower the monthly payment on a lease. That is good for the consumer but risky for the car company, which stands to lose if the vehicle is worth less than the residual on the used-car market.
“That is how they move more cars than they would otherwise,” Spinella said. “Part of the marketing costs of selling a car is to support the residual value and be willing to pick up the difference if it isn’t worth that much at the end. That can be quite expensive.”
Silverman said because luxury brands lease a higher percentage of their cars, they tend to support leases with inflated resale values or lower interest rates instead of using rebates to draw customers.
“It’s simply another marketing cost,” he said. “They are deciding to discount the car through a lease instead of a cash rebate, more advertising or whatever. A lease special may be less insulting to a (luxury) customer than a $2,000 cash rebate.”
Ford historically has not inflated residual values or reduced interest rates to lower lease payments, said spokeswoman Joy Wolfe.
“The thing we do the least is residual support,” she said. “The most we do is in retail cash rebates, which can be applied to either a purchase or a lease.”
Besides rebates that apply to buying or leasing, Ford also offers low-interest financing to buyers. Though resale value is more obvious in the way it affects the cost of a lease, it also affects the cost of buying a car, the leasing guide’s Aiken said. “If two cars both cost $15,000, and in two years one is worth $12,000 and the other $10,000, then that’s the same as paying $2,000 more when you bought the car,” he said.
