Car Leasing: Why It’s Not So Attractive Anymore
To Lease or Not to Lease
The New Vehicle You Got Back In The 90’s Was Probably Leased…
If you bought a vehicle back in the mid to late 90’s there’s a good chance you didn’t buy the vehicle, you leased that new piece of shinny metal. Why? Because leasing was on “fire” back in that era. I was working in a Nissan store at the time, and our lease penetration was over 70%. In other words, 7 out of 10 people that made a new vehicle purchase went the leasing route. Most stores in today’s market don’t even lease 7 new vehicles a month.
I remember you could lease a brand new Nissan Altima for $169 a month for 24 months with almost nothing out of pocket. Then, after the 24 months were up, Nissan was sending their customers a letter asking them if they wanted to extend their lease for another 24 months for the same payment. That had to be the biggest no brainer in the car business.
That equated to about $8,000 in lease payments for 48 months for a pretty nice car that was fully equipped with power windows, power door locks, remote power mirrors, A/C, and an AM-FM Stereo Cassette. To lease a Nissan Altima today could almost double that. But think about this…Has that vehicle doubled in price? Sure, it’s gone up a few thousand dollars but it’s nowhere close to being twice as much.
Why the difference...
The question that has to be running through your head right now is what happened? Why such a night and day difference? Why didn’t leasing stay so popular? Well, the old saying holds true here…
“If something appears to be too good to be true, then it probably is.” Those deals back in the 90’s were too good to be true. That being the case, the leasing companies weren’t able to keep the ball rolling. In fact, if you remember correctly leasing companies went out of business much the same as the latest banking meltdown when banks bit the dust left and right.
But the big difference is obvious…The deals just aren’t as attractive as what they were back then. When you compared apples to apples, a lease versus a purchase, the lease was the obvious way to go.
Whether people lease or finance they all boil down to, “What’s it gonna cost me a month.” If you could save over $100 a month, without having to put anything (or very little) down for a down payment, on a shorter term; then that was a slam dunk for most people.
Why Don’t The Leasing Companies Bring Those Deals Back…
So if you’re scratching your head right now wondering why the leasing companies don’t bring those deals back, you’re probably not alone. The main reason they can’t is they can’t afford to lose money. Everyone is obviously in business to make money.
The leasing companies were showing a big profit back then when the vehicles were originally leased. It wasn’t until the vehicles came off lease when all their profits went down the drain. In one respect it was almost a ponzi scheme. They were “Stealing from Peter to pay Paul”, but when it came time to pay Paul they were broke; consequently leasing companies were dropping like flies.
Here’s The Long & Short Of What Happened…
In a nutshell here’s what happened…I don’t want to get into all the mechanics of how a lease is calculated, but the basics are this: You’re basically paying for the depreciation on the vehicle. The less the vehicle depreciates, the lower your monthly payments. The depreciation in terms of a lease is what’s called the residual value. And guess who sets the residual value? That's right, the leasing company.
The residual value in terms to the consumer would be a guaranteed value at the end of the lease. In other words, when the consumer leased the vehicle they had the option to purchase (assuming the lease was closed-end which 99.9% were back then) the vehicle for whatever the residual value was. And it was in the contract the day they signed the lease, so they knew up front what the deal was.
If a vehicle’s MSRP was $18,995 and the residual value was 65%, then that meant the customer could purchase the vehicle for $12,346.75 at the end of the lease. When these vehicles came off lease, most customers didn’t buy out the lease. Why? The car wasn’t worth it. You could go out and find the same vehicle for thousands less if you wanted to look a little.
The Leasing Companies Got Hammered…
When the vehicles came off lease, they went back to the leasing company. What did the leasing company do with them? They took them to an auto auction and were sold to the highest bidder.
Since the leasing companies were the ones that set the residual value, they were now on the hook for absorbing the loss at the auction. And lose they did, by $3,000 and up per vehicle. If the vehicle had a $12,000 residual value, they were only bringing $9,000 at the auction (or less). It doesn’t take long before that will put you out of business.
Then Why Were The Residual Values Inflated…
The higher the residual value, the lower the payment is to the customer. That being the case, the leasing company inflated the residuals to make the lease so attractive. Had they put realistic residual values on the vehicles to begin with, they wouldn’t have lost so much when they went to dispose the vehicles at the auction. But the flip side is, they wouldn’t have leased so many vehicles either because the deals wouldn’t have looked as good.
They learned their lesson, so today’s leasing companies are putting residual values that are more realistic. Since the residuals are more of a real value at the end of the lease, the deal just doesn’t look so attractive. That being the case, leasing just ain’t what it used to be.