Car Lease - Does It Make Sense?

Auto leasing is on the rise again. Does it make sense for you?

James M. Flammang / autoMedia.com

Updated July 2011 — A decade ago, car leasing drew plenty of takers. In 2000, for instance, 30.5 percent of vehicles were leased rather than purchased. Then, leasing began a downward slide, closing in on 19 percent in 2004 before rebounding past 27 percent in 2007. Soon afterward, as the financial crisis began and new-car sales skidded, car leasing slipped dramatically, dropping by one-fourth in 2008 alone as the "Detroit 3" automakers turned away from leasing.

By mid-2010, though, leasing was back up to 25 percent of "personal use" vehicles, according to Tom Kontos, executive vice president of customer services and analytics for ADESA (a prominent wholesale action group). Research by CNW Marketing indicates that the recent high point for leasing—27.8 percent—occurred in November 2010. By June 2011, lease originations eased back to 24.6 percent.

J.D. Power & Associates reports that leasing was steady in mid-2011, with penetration approaching 20 percent—after peaking at 23.1 percent in February. In mid-2010, just over 18 percent of vehicles were leased. Automakers have been "a bit more generous with leasing incentives," senior director Thomas King told Auto Remarketing magazine. (J.D. Power figures are lower because they exclude leases that are strictly for business use.)

Vehicle types have been changing, though. The leasing rate for large pickups has grown considerably, though it's still only 5 percent of total sales. Compact premium cars are those most often leased (53 percent in mid-2010). Midsize utility vehicles come next at 27 percent, followed by compact and midsize cars at 26 percent. Only 7 percent of subcompacts have been leased lately.

Residual Values Are Strong

Analysts at Automotive Lease Guide (ALG) predict that by 2012, car leasing could penetrate 43 percent of the luxury-vehicle market. ALG forecasts "a significant resurgance" through 2015, led by the luxury segment. Mainstream-model leasing will rise by 17.5 percent in the next two years, ALG predicts. Hyundai is expected to see the largest gain in leasing, mostly because its residual values have been rising. MINI Coopers, Subarus, Mazdas, and Hondas lead the lease-origination list among mainstream cars.

Why does the forecast look bright for leasing? High residual values (an estimate of what a car will be worth several years hence) make for "highly competitive monthly lease payments," ALG states, and residuals have been strong lately. In addition, the "residual gap between brands continues to shrink," according to ALG.

Lease originations are growing not only as a result of financial issues and easing of credit, ADESA's Kontos notes, "but primarily because new-vehicle sales themselves have come back." Kontos adds that the Consumer Price Index (CPI) for leasing has "been coming down," after peaking in April 2009.  Car leases are based on what a vehicle is expected to be worth at the end of the lease term. So, the lessor pays only for the loss of value in that period. As Kontos describes it, in a 36-month lease, you're essentially paying for roughly "half a car." Actually, it's not quite a simple matter of subtracting the anticipated residual value from the car's selling price. Lenders also consider credit rates and incentives to get the final figures for down payment (called "capitilization cost") and monthly payments.  Deciding whether to lease a vehicle is a matter of mathematics, mildly tempered by emotion. Simply put, over a period of several years, you're paying for the use of the vehicle, not for the vehicle itself. Before deciding, consider these points:

• Leasing is cost-effective only for models that hold their value well (have high predicted residual value).
• A subvented lease, where the manufacturer offers an incentive that keeps the monthly payment low, is the most attractive, but they're less common than in the past. Leases with $179 and $199 payments are easy enough to find, but the era of $99 leases for, say, a Mazda MX-5 Miata, is gone. 
• If monthly payments are especially low, you'll probably be paying a higher down payment ("capitalization cost").
• Upfront costs include local taxes (which vary considerably) and dealer fees (which aren't necessarily negotiable).
• Leases specify a mileage limitation; go past that odometer reading, and you'll pay an extra per-mile charge.
• Excess wear-and-tear at turn-in time means you'll pay extra to end the lease.
• It's generally a lot harder to get approved for a lease than a loan; leases demand a higher credit score.

Related Articles: Auto Leasing Makes a Comeback Auto Leasing Looks Strong for 2011 and Beyond Auto Leasing Isn't for People Prone to Worry