LOS ANGELES -- Eager to regain market share in the price-sensitive compact segment, Toyota is cutting customer lease payments on the redesigned 2014 Corolla by setting residual values much higher than in the past, according to dealers and lease trackers.
It's a risky move. Toyota and its finance captive are counting on lease-end values to be well above those of competing cars that have long enjoyed stronger residuals than the Corolla.
Boosting the residual forecast means reducing the principal carried on the lease, thus lowering monthly payments. That's a key factor as Toyota angles to become No. 1 again in the compact sedan segment. The Corolla was the compact king for nine years in a row before being overtaken by the Honda Civic in 2012.
The 2012 Civic was a miss with critics but a hit with car buyers after Honda increased incentives. This year the re-engineered Civic's incentives are almost zero, but the Civic still led Corolla through July, 191,120 units to 183,435.
With the Corolla's launch this month, Toyota has lease incentives right out of the gate. Three-year leases from Toyota Financial Services on most trim levels will be assigned a residual value of 63 percent for a 15,000-miles-per-year lease. For the Corolla S, the residual is 65 percent. For a lease of 12,000 miles per year, Toyota will add 2 percentage points on all trim levels.
ALG, a research company that monitors and projects vehicle values, says Toyota is at least 3 percentage points too optimistic, even in a best-case scenario. If Toyota really misses the mark and residuals hold at their historic rates, Toyota Financial Services could be on the hook for big losses three years from now.
Vince Bray, a spokesman for Toyota Financial Services, said the captive isn't taking undue risks. He said increasing residuals is a cheaper incentive than cash on the hood and better for preserving brand value.