A glut of off-lease vehicles and falling prices for used vehicles are tempering the auto industry’s zest for leasing.
CNW Marketing/Research of Bandon, Ore., says the number of off-lease vehicles climbed to a high of 3.2 million last year, about 400,000 more than the previous year and nearly twice as many as in 1994.
As the number of off-lease vehicles (vehicles returned to dealers at the end of the lease period) increases, the National Automobile Dealers Association reports that more are winding up in the hands of the leasing companies instead of being kept by dealers for sale as used cars or being purchased by consumers.
The percentage of off-lease vehicles returned to leasing companies such as General Motors Acceptance Corp., Ford Credit and American Honda Finance rose to 53 percent last year from 44 percent in 1996.
Twenty-one percent of consumers bought their vehicles at the end of the lease in 1997, according to the NADA. Dealers kept 40 percent of the off-lease vehicles in 1995 but only 27 percent last year.
As the number of off-lease vehicles climbed to 3.2 million, dealers reached the saturation point for late-model used cars, said Mike Morrisey, a NADA spokesman.
“They’re tired of having to dispose of all those vehicles,” Morrisey said. “There are just so many of them.”
The 1.7 million vehicles that went back to the leasing companies were sold at used-car auctions.
“When they sell at auction, they don’t always reach their residual-value expectations,” said John Blair, vice president of the Automotive Lease Guide, a Santa Barbara, Calif.-based company, that projects resale values for the leasing industry.
Residual value, the leasing industry’s term for resale value, is set by the leasing company when the lease is signed. It is a prediction of what a vehicle will be worth at the end of the lease.
Because most of the cost of a lease covers depreciation, the less a vehicle depreciates, the less it will cost to lease. Some car companies have been too optimistic with their residuals and have sustained big losses when they auction off-lease vehicles.
Nissan, for example, reported in June that it lost $383 million last year from residual shortfalls on off-lease vehicles. Leases accounted for more than 40 percent of Nissan’s U.S. sales in 1996 and 1997, but this year the company is encouraging consumers to buy its vehicles with $2,000 cash rebates.
Three of four vehicles returned to leasing companies fail to sell for their projected residual value, according to a recent study by the Consumer Bankers Association, and the average loss is $1,756.
“In the last year or two, we’ve seen a general softening of residual values in the used-car market,” Blair said. “Lessors have been experiencing more residual risk.”
Most manufacturers became less optimistic with residual values as used-car prices fell the last two years, Blair said.
“It was fairly common practice that a lessor would come out with a higher residual value than what we would give,” he said, though it is less common now.
Used-car values climbed through 1995 before starting down. Blair called it “a cyclical business, and we’re now seeing a correction in the market.”
Will this mean higher lease payments for consumers?
“If they take a more conservative approach on residuals, you could see the monthly lease payments go up a little,” Blair said, though lessors can use other tools, such as a lower interest rate or bigger price reductions to trim monthly lease payments. “My gut feeling is you will see a slight uptick in the lease payments.”
Leasing, which accounted for less than 8 percent of retail sales in 1990, grew by leaps and bounds in the early 1990s but leveled off at about 30 percent last year. CNW projects that retail leasing will grow slowly over the next five years, topping out at about 3.3 million units annually.
“There is a certain percentage of people who like to lease because it allows them to change vehicles more often. But leasing is not appealing to everyone,” Blair said.
Sandy Silverman, president of Steven Todd Leasing, an independent leasing broker in Northfield, says the growth of leasing is slowing because the car companies aren’t promoting it as heavily.
“There’s an overabundance of cars, and the manufacturers are offering very generous incentives to buy,” Silverman said. “They’ve been pushing low-rate financing like 1.9 percent and 2.9 percent, and that encourages a lot of people to buy instead of lease.”
A majority of consumers who try leasing apparently like it. Ford Credit, the financing subsidiary of Ford Motor Co., one of the largest leasors, says 57 percent of its Red Carpet Lease customers lease again. Fifteen percent buy the leased vehicle at the end of the term, and another 22 percent buy a different vehicle.
Ford still heavily promotes two-year leases, but most car companies have migrated to longer terms. Residual value is a factor in that move, Blair said.
“A two-year term has greater potential to be more volatile than a longer term,” Blair said. “There’s greater residual risk.”
Three-year leases are most popular now, but CNW Marketing/Research expects four-year deals to become nearly as popular over the next few years.
Silverman said car companies push two- and three-year leases because they want their customers to come back more often. More of his customers are asking for four-year leases.
“It’s easy to figure out why,” Silverman said. “Cars are better these days, so there’s less risk.”
A four-year lease also reduces the monthly payment, which Silverman said remains the key attraction with leasing.
“When we get new customers, they’re looking for the lowest price they can find,” he said. “It’s just the nature of the beast.”
Much ado was made last year about federal regulations that took effect Jan. 1 that were supposed to make leasing easier to understand for consumers. The rules require lease contracts and advertisements to clearly show the price of the vehicle, all upfront costs and potential end-of-lease expenses.
However, the federal agencies that created and police the new rules say there has been little feedback from consumers.
Jeanne Hogarth, a senior analyst with the Federal Reserve Board, which issued the new regulations, said the agency surveyed 190 consumers this year, and only 20 had leased after Jan. 1.
Though that survey was too small to be statistically valid, it indicated the new rules didn’t have much effect.
“What we found was that consumers aren’t really paying attention to the new disclosures,” Hogarth said. “Any time you sign a financial contract, you have lots of papers shoved in front of you. It sounds trite, but people really do need to read the lease.”
The Fed has distributed more than 700,000 brochures explaining the disclosure rules and leasing advice, and Hogarth said this has helped educate consumers.
The Fed plans to add an electronic learning guide early next year to its Web site (federalreserve.gov) that will allow consumers to punch in numbers and generate “what if” leasing scenarios.
The brochure, “Keys to Vehicle Leasing,” is available through the Web site.
Consumers may not be alone in not paying attention to the new federal disclosure requirements.
The Federal Trade Commission, which enforces the regulations, expects to issue orders soon against car companies and/or dealers for violating advertising rules.
“You can expect to see more enforcement activity in this area fairly soon,” said Carole Reynolds, a staff attorney with the FTC. “Advertising continues to be a very big focus here.”
Eight car companies–General Motors, Honda, Toyota, Volkswagen, Audi, Isuzu, Mazda and Mitsubishi–and some of their ad agencies are under FTC orders for violations before the new rules took effect.
The orders carry penalties of up to $11,000 each time an offending ad appears.
Previous violations included prominent promises of “no money down” while disclosures that thousands of dollars were due at the start of the lease were hidden in the fine print. The current rules require that charges buried in the fine print now must be as prominent as the monthly payment.
