One size does not fit all when it comes to auto leasing.
The 36-month lease– the industry’s equivalent of the size 40-regular suit–is the most common, but car companies offer terms from 24 to 60 months. Some will tailor the terms even more if their customers don’t find what they want on the rack.
Mercedes-Benz is the most willing to custom tailor. It lets consumers decide how long they want to lease a car within a range of 24 and 60 months.
“On a case-by-case basis, we can be even more flexible,” said Bruce Lee, a spokesman for Mercedes-Benz Credit Corp.
Twenty percent of the leases Mercedes wrote in 1997 were what the company calls “flexible terms” such as 27 or 33 months instead of the typical 24 or 36 months.
Flexible terms allow a customer to keep a car such as an SL roadster a few months longer to have it in the summer, Lee said. Others schedule their lease to expire on a special occasion like a birthday, anniversary or Valentine’s Day so they can acquire a new one as a present.
“There are people out there who can do that,” Lee said of Mercedes’ blue-chip clientele.
Other car companies tinker with lease terms, though not with the same flexibility and for different reasons.
Mitsubishi offers 42-month leases on its Eclipse and Galant models primarily to lure consumers with a lower monthly payment than the standard three-year term.
“A longer term gives you a slightly lower payment,” said Rob Mize, leasing manager for Mitsubishi Motors Credit of America. “Customers are always looking for a lower payment. Forty-two months also is very close to the amount of time most lessees say they want to keep their cars.”
Mitsubishi offers 24-month leases, but Mize said the shorter term raises the monthly payment and forces consumers to have to shop again too quickly. “Ideally, we would like to see our customers come back every two years, but that doesn’t match their perception of how long they should keep the car,” he said.
That is at odds with the approach of Ford Motor Co., which champions the two-year lease, saying it increases customer satisfaction and keeps customers in Ford vehicles longer.
More than 90 percent of Ford’s Red Carpet Leases are for two years, and the company says 74 percent of its lessees stay in the Ford family, the highest loyalty rate in the industry.
Ford offers three-year programs on six models–Ford Explorer and Taurus, Lincoln Continental and Mercury Mountaineer, Sable and Villager–in the Chicago area and other regions.
Tim Gates, Ford’s Red Carpet Lease manager, said these leases are a response to rivals who advertise three-year terms with lower monthly payments.
“We’re doing this reluctantly,” Gates said of the three-year leases. “There is a lot of competition in those segments. We have to be competitive and offer more choices on our core vehicles.”
Gates said Ford is not backing off from two-year leases.
“We’re committed to the short-term trade cycle. There are a lot of benefits for the consumer with a shorter term. They get a new vehicle more often, it’s always under warranty and there is little maintenance.”
There is also an obvious benefit for Ford: Over six years, the company can sell three vehicles instead of two.
Ford does not intend to stretch beyond three-year leases, Gates said, but is looking at flexible terms such as Mercedes’.
Art Spinella of CNW Marketing Research sees the industry leaning toward longer terms. His firm calculates that the average lease has crept up to 39 months from 37 a year ago. With a flood of late-model cars coming off of short-term leases, he said, used-car values have dropped, steering most manufacturers away from two-year programs.
“A lot of car companies don’t want to see their cars come back so fast,” Spinella said. “With the exception of Ford, the car companies look at leasing as a problem of cars coming back. Ford looks at it as customers coming back. When you look at it that way, it is an opportunity to sell customers another car.”
Illinois’ sales tax law discourages two-year leases. Leasing customers pay tax on the full price of the vehicle instead of on the monthly payments, as in most other states.
Sales tax rates vary in Illinois, but in areas where it is 8 percent, a $20,000 leased vehicle is taxed $1,600.
Spinella said more companies are copying Mercedes with flexible lease terms, and some are timed to bring customers back to dealers when a new model arrives. For example, his company is nearing the end of a 19-month lease on a Chevrolet Tahoe that coincides with the introduction of the 1999 Tahoe.
Audi sales executive Joe Drouin said a 39-month term for the Cabriolet offered in the winter pays dividends on the car’s residual (or resale) value. The three extra months mean the cars come back in the spring, when there is more demand for convertibles and prices for used models go up.
Audi also found that a 39-month lease on some of its other models lowered the monthly payment by about $10 from 36 months, and the longer term did minimal damage to the residual value, Drouin said.
Drouin said Audi is reluctant to go longer than 39 months because of warranty limits. Audi covers its cars for 36 months or 50,000 miles, whichever comes first. The company will bend the three-year limit on a 39-month lease, he said, but not the 50,000-mile limit. With a longer lease, customers are more likely to exceed 50,000 miles.
Spinella advises consumers to avoid long-term leases, regardless of how low they make the monthly payment. Most warranties end at three years, just when maintenance costs increase.
“If you’re going to lease a car for four or five years, you might as well buy it,” he said. “You’re going to have more expenses like buying a new set of tires. Then, you have to give them away when you turn the car back. It’s like roofing your neighbor’s house.”
While car companies offer 48- and 60-month leases, they tend to push shorter terms.
“Frankly, I want my dealers to see their customers more often than every five years,” Nissan regional manager Patrick Doody said.
About half of the leases issued by Nissan Motor Acceptance Corp. in the Chicago area are 36 months, but 23 percent are 39 months and 18 percent are 42 months.
“It’s a matter of when we want them to come back,” Doody said of the different terms.
“We don’t want them to all come back at the same time. Spring is the best time, because that’s when used-car values surge.”
Mitsubishi also offers 60-month leases but focuses on 36- and 42-month terms.
“Price is always the overriding concern, but we’re trying to provide the proper balance of benefits,” Mize said. “From our point of view, we’d like to get them back sooner than 48 or 60 months.”
Banks and leasing companies such as Chase Automotive Finance and GE Capital are more likely to promote four- and five-year leases, Spinella said.
“They’re leasing money,” he said. “They don’t care about cars. Chase Manhattan Bank makes money by lending you money. Car companies make money by manufacturing cars.”
