2-year leases take off at Toyota

ToyotaCare, which provides free maintenance for the first two years on lease and purchase vehicles, is a big draw for consumers. Photo credit: BLOOMBERG
Keeping it short
At Toyota and Chrysler, 2-year leases are increasing as a percentage of total lease business, while Ford and Nissan are swinging away from them.
 2-year leases as % of lease portfolio March-May 2014Change in share from trailing 12-month average
Industry average9%-1%
Source: TrueCar; includes captive-finance and third-party lease deals

LOS ANGELES -- Toyota is seeing a strong shift into two-year leases this year, a trend that promises quicker customer turnarounds and fuller used-car inventories down the road.

At Toyota Financial Services, leases spanning 27 months or less account for 17 percent of its lease portfolio so far this year. That's nearly five times last year's rate of 4 percent. For Lexus specifically, two-year leases have risen to 36 percent of the division's lease portfolio this year from 24 percent in 2013.

This shift comes as Toyota Motor Sales U.S.A. leans more heavily on leasing to move Toyota, Scion and Lexus vehicles.

Chrysler, too, has had a higher share of two-year leases this year, while Ford and Nissan are seeing a swing away from shorter terms.

As a result, the industry penetration of under-27-month leases remains relatively static -- at about 9 percent of all leases, according to TrueCar data on captive and third-party lease deals -- while three- and four-year leases remain the norm.

Periodic shifts between shorter and longer lease periods are common, depending on factors such as interest rates, product cycles, residual values and used-car supplies. Short-term leases act as a counterweight to the current trend toward longer loan terms by bringing customers back to the market more often.

Maroone: "Retailers will buy the off-lease vehicle."

Automakers are "confident that retailers will buy the off-lease vehicle," said Mike Maroone, COO of AutoNation Inc., the nation's largest dealership group. "The 24-month lease shortens the trading cycle, and [automakers] sell more cars."

Such leases can come at a cost to the consumer because of the shorter time frame to absorb the vehicle's sharp initial depreciation. While a 48-month lease on a new Camry -- with no down payment or trade-in -- runs about $311 a month, and a 36-month lease costs $333 a month, monthly payments on a 24-month lease jump to $382, according to Toyota's online calculator.

But consumers are drawn to shorter terms for many of the same reasons that prompt them to pick leasing over financing: lower maintenance costs, less commitment and the chance to stay in a relatively new vehicle. In the case of Toyota, a big draw is the ToyotaCare program, which provides free maintenance for the first two years on lease and purchase vehicles.

Brock Bayles, Toyota Financial Services national product manager, said TFS isn't pushing dealers to pursue short-term leases. But both the Toyota Financial Services and Toyota Motor Sales Web sites promote 24-month leases and include a calculator for comparison.

"Consumers can see it's a viable option for them," said Tom DeLuise, Toyota Motor Sales national manager of certified vehicles and rental car sales and operations. "It provides more options for their next vehicle."

The shorter terms pay off for Toyota as well. Toyota's certified used-vehicle program relies heavily on trade-ins and lease returns, which together constitute about half of its certified-vehicle inventory. This year, that number of trade-ins and turn-ins is down about 30 percent, DeLuise said, and Toyota needs to build that inventory back up.

"By pulling forward 24-month leases, you are creating a different shape to that used-vehicle supply curve," said Eric Lyman, vice president of editorial and consulting for residual-value tracker ALG.

In the case of Chrysler, a push to move the outgoing and incoming Dodge Charger sedan led to the creation of 12- and 24-month leases, Lyman said.

For the March-May period, the share of short-term leases in Chrysler's overall lease portfolio grew to 17 percent, according to TrueCar data of captive and third-party lease deals, up by a third from the trailing 12-month average.

"Chrysler is trying to conquest more sales and grow the brand's retail share," said Lyman. "The 24-month lease is a way to ask for a shorter-term commitment. That gets you someone on the fence for a Chrysler who might be looking more at an import brand."

Ford remains the leader in leases under 27 months -- at 21 percent of all lease contracts -- but that level is 10 percent lower than last year, according to TrueCar.

Ford sales analyst Erich Merkle said 36-month leases are becoming more popular this year, but he declined to specify which models were leading the charge. "Ford makes its 24- and 36-month lease programs equally attractive for the consumer," Merkle said.

Nissan, meanwhile, saw its short-term lease penetration grow in 2013 because its two-year leases carried stronger residual values, but the pendulum is swinging back.

"As lease penetration rates increased through 2012 and 2013, and used-car forecasts were looking light, two-year residuals were very strong -- sometimes even stronger than three-year residuals," said Dan Mohnke, Nissan Division chief marketing manager. "That is starting to normalize, and we're seeing more three-year leases as a result."

You can reach Mark Rechtin at mrechtin@crain.com -- Follow Mark on Twitter: http://www.twitter.com/markrechtin