Auto Leasing Is Back -- With a Few Twists

From Edmunds.com

Car leasing is now going through a surge in popularity, recovering from its sharp decline during the recession. Leasing is at a near-record high, with slightly more than one in four consumers choosing this method for financing their cars. But shoppers should be alert to some of the new trends so they can arrange a lease that best suits their budgets. 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 be misled by finance managers and car salesmen who hide 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 average car lease "term," which is the number of months in the contract, dropped slightly from 42 months in 2003 to about 36 months in March 2011. It is even common now to see leases for as few as 24 months.

• Manufacturers are offering leasing on a greater number of compact cars, which shows that they are extending their markets to new demographics. Furthermore, as the quality of compacts improves, the price of these cars rises, so leasing can offset the impact of this increase on the consumer. In fact, only 12% of compacts were leased back in 2003, while that proportion surged to 24% in 2010.

• The number of miles included in lease contracts is dropping, which could catch some consumers unawares and lead to costly end-of-lease penalties. Leases in 2003 typically included 13,000 miles of travel, but this number has dropped to 12,000 miles today. Some manufacturers even offer leases with only 10,000 miles included.

• The average monthly lease payment has dropped slightly, from $432 to $412.

• The typical interest rate (called "lease factor") has fallen dramatically, from 4.9% in 2003 to the current 2.8%. This is responsible in part for the lower monthly payments seen in current lease deals.

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:

• Don't let the car dealer push a lease with a term longer than 36 months. Beyond three years, you'll face the extra cost of an extended warranty or out-of-pocket payments for repairs.

• Remember that advertised lease payments do not include sales tax and fees. An advertised payment of $199 a month could easily be $216 or more. Over three years, this represents an extra $612.

• Don't be misled by very low monthly payments, since they will typically require high drive-off fees. Plan to put down about $1,000 to get started, even if you have to pay more each month.

• Verify the number of miles the lease allows (12,000 is the industry norm). Be realistic about whether this is enough. Remember, it's cheaper to buy more miles at the beginning of the lease than pay the penalty at the end.

• Make sure that you get gap insurance as part of the contract. Gap insurance, which covers the difference between what your car is worth and what the insurance company will pay if the car is totaled or seriously damaged in an accident, is included in most lease contracts.

Copyright Edmunds.com Inc. All rights reserved. First published on www.edmunds.com and reprinted with permission. Edmunds and the Edmunds.com car logo are registered trademarks of Edmunds.com Inc.

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