Why so few lease deals? Here are 3 reasons
|James B. Treece is industry editor for Automotive News.|
I can give three very good reasons why we haven't seen a spate of attractive lease deals by automakers' captive finance companies to spur sales. But I'm still surprised by the relative paucity of lease deals being offered.
There are two strong arguments for tantalizing customers with leases.
Used-vehicle prices are high, and ALG and others that predict residuals will remain strong. So finance companies can offer eye-popping lease deals just on the value of the projected residuals. They don't really even have to subsidize the lease to reach a number that should attract consumers.
Automakers naturally prefer leases over cash on the hood or low-APR deals. A lease customer comes back to the dealership, and the brand has another shot at that customer.
So why aren't we seeing more lease offers? Three factors are at work.
1. Automakers are keeping their powder dry.
The conventional wisdom is that an incentive war will break out late this year. Japanese brands that have lost market share this year because of inventory shortages after the March 11 earthquake in Japan will come out with their incentive guns blazing. They'll want to regain market share and won't be shy about spending to make it happen.
At that point, rivals will need to answer the initial volley of incentives, and leases will be part of their arsenal.
Dealers report that some captives already are offering 85-month financing, and eight-year warranties. If they want to stand out in a market like this one, leases are the next way to go.
2. APR rules
Interest rates are low. That makes the 0-percent financing deal easy to offer, and nearly ubiquitous these days. I counted 21 brands offering 0-percent deals in the Sept. 19 Automotive News' incentives table. Others offered 0.9-percent deals.
As one dealer recently said to me, "When was the last time you saw 0 percent and $500 off a Toyota Camry?" Admittedly, Toyota wants to clear out the 2011s to make room for the redesigned 2012s, but it's not like they're sitting on 538 rail cars full of 2011 built-in-Kentucky Camrys.
3. Heightened competition
More lenders are entering the automotive lending market, or re-entering after leaving during the recession. Lenders are coming out of the woodwork, and many of them are more comfortable with extra-low-rate deals rather than trusting residual values, especially after they were burned recently.
But their eagerness to build up their auto-loan portfolios isn't necessarily a good thing.
As a dealership finance boss warned at a recent conference for credit unions' auto-lending executives, "You see Bank of America jumping back in. That's always a sign that something crazy is going to happen."
You can reach James B. Treece at email@example.com.