Leases: A whole new deal

The growth of vehicle lease programs over the past quarter century was one of those rare win-win-win scenarios.

Customers flocked to leasing because it allowed them to drive upscale cars they might not have been able to finance. Dealers embraced lease programs because customers returned to their dealerships at the conclusion of two- or three-year leases to trade in their cars for the latest models. And automakers prioritized leasing because even as new cars rose in price vis-à-vis consumers' incomes, those cars were still within lessees' budgets.

Today, though, automotive leasing is undergoing fundamental changes. Earlier this year, Chrysler announced its financing subsidiary wouldn't be writing leases any longer. General Motors and Ford soon followed by instituting leasing restrictions, and banks like Wells Fargo and Chase with age-old auto lease programs opted to end theirs.

Why the sudden retrenching of programs that had been blockbusters for decades? According to Edmunds.com's senior consumer advice editor Philip Reed and senior features editor Joanne Helperin, the answer lies in new vehicles' residual (resale) values.

In a recent article on the Edmunds.com website, Reed and Helperin note that accurately calculating residual values at the end of lease terms was key to establishing lease rates that would provide a fair profit. (This is because rates are largely based on the difference between a vehicle's initial transaction price and what it's worth at the end of the agreement.) During a period with rapidly rising gas prices and the weak housing market, residual value of vehicles fell sharply, especially for SUVs and trucks, they wrote.

Jesse Toprak, executive director of industry analysis for Edmunds.com, cites numbers to demonstrate just how steep those dives have been. In some instances, large SUVs and trucks that once came off lease carrying a 40 percent residual value are now worth just 28 percent of what they were when they were new.

This doesn't mean the end of new-vehicle leasing, but it does mean consumers should be prepared for changes in lease programs. Because leasing still is a win for all three players in the transaction - consumers, dealers and automakers - leasing will continue, but will likely carry higher payments.

"To some degree, leasing is a self-adjusting finance method," Reed and Helperin write. "Now that resale values are falling, lease payments will certainly go up...The days of screaming lease deals are over for now."

The upshot, they maintain, is that consumers leasing cars will need to examine more closely just how much they can afford in a lease deal. They may no longer be able to drive a new car they couldn't necessarily afford in an outright purchase.

That wasn't so much the case back when folks could lease a BMW for about the same monthly price they would incur if financing a Honda Accord, the authors write.

It's not unlike those late, misguided days when people who migh previously have been stretched thin buying a condo were able to land a large single-family home. Creative lending allowed them to reach for homes they couldn't afford. All was rosy as long as home prices continued to rise. When prices instead fell, many of these overstretched homeowners were thrown into foreclosure.

"What is happening in the auto leasing market could be called another 'economic correction,'" Reed and Helperin note.

Consumers should consider the following bits of wisdom when preparing to lease a car, the writers suggest. First, it will pay to have good credit, because credit requirements will ratchet higher in the new lease era. "In some cases, only people with the best credit will qualify for manufacturers' leases," they advise.

Also keep in mind that some buyers can still claim the cost of leasing a vehicle as a business deduction, which can help offset higher lease payments. And note that foreign automakers whose cars retain higher residual values are still likely to feature solid leasing programs and attractive lease rates.

And even those interested in leasing a vehicle from an automaker who's otherwise gotten out of that particular end of the business will probably be able to get a lease through an independent company. Edmunds.com advises consumers to check rates at several banks, smaller leasing companies and their credit unions to obtain a lease. Auto dealers will likely also be able to help locate alternate leasing sources.

For many, buying may now be a superior choice to leasing - especially in light of the inducements offered by automakers and retailers, including favorable deals, generous rebates and attractive financing.

However, if the current economic crisis continues to tighten consumer credit and makes getting a loan unduly difficult for the average motorist, leasing may gain strength as a more-viable alternative.