“As part of our annual August model-year clearance, we are leveraging the move from leasing to retail purchases to offer our customers the best deals of the year and make buying as affordable as renting,” Jim Press, Chrysler vice chairman and president, said in a release announcing the new program.
Hallelujah. For years, I’ve been trying to get people to see the financial folly in leasing a vehicle. Finally, it’s taken a convergence of economic events – rising gas and food prices, a slow economy, job losses – to park auto leasing as a lifestyle.
Beginning in the 1990s, the percentage of consumers who leased their vehicles began to significantly rise. People who couldn’t afford to buy luxury vehicles found they could rent a better ride by leasing.
Foolishly, consumers bought the marketing hype that leasing made sense if you had to have a new car every few years. They focused on the short-term truths about leasing such as monthly payments lower than monthly car loan payments.
About 19 percent of vehicles driven out of showrooms last year were leased, according to Edmunds.com, an online resource for automotive information. Automobile leasing expanded 21 percent between 2005 and 2006.
One of the key factors in a lease contract is what’s called its “residual value.” That is the amount you need to buy the car at the end of the lease.
As gas prices have surged past $4 a gallon, used SUVs and other gas-guzzling vehicles have become increasingly difficult to sell. Because of the lower projected values, leases on such vehicles will become more expensive, according to Automotive Lease Guide, which provides residual value forecasts.
Many auto finance companies are taking huge losses because they “did a bad job of projecting that the residual values were going to be down,” said Sergio Stiberman, founder and chief executive of LeaseTrader.com, an online marketplace that matches people wanting out of a vehicle lease with individuals looking for a short-term lease.
Additionally, people who are coming to the end of their leases for SUVs and other vehicles with poor fuel economy aren’t opting to buy them because of high gas prices, contributing to the lease losses, Stiberman said.
So the curtailing of leasing may come not from people exercising common sense but by market forces.
Now if you still think leasing can work, let me try to dissuade you. Here’s why leasing is an unwise choice:
- You can get a luxury car for less money on a month-to-month basis, but this only means you are living beyond your means. In June, the BMW 3 Series was the most preferred leased vehicle, according to LeaseTrader.com.
- Lease contracts typically impose additional charges for excess wear and tear. I’m guessing the folks who irritatingly take up two parking spaces to avoid dings are probably leasing.
- You may drive more than you anticipated. If you exceed your mileage allotment, you will pay dearly, typically 15 cents to 25 cents for every mile over your limit.
In its release, the National Vehicle Leasing Association says “leasing is inherently good for the consumer, affording them more options and less financial risk than ownership, especially when compared to a long-term finance agreement.”
I agree with the organization on one point. I wouldn’t buy a car with a loan term of more than 48 months. But I hope the association is dead wrong that leasing isn’t dead.
Long term, paying off a car and keeping it for years are inherently better ideas for you financially. If you want to be rich instead of riding around looking like you’re rich, don’t lease.
by Michelle Singletary
WASHINGTON – Is auto leasing really dead? Oh, I so hope so.