High gas prices, low resale values may doom auto leasing

The North American automotive industry is experiencing a major shake-up, as automakers, new car dealerships, financial institutions and consumers adjust to new marketplace realities.

The latest shockwave is the scaling back on auto leases – first by Chrysler in the U.S., followed by GMAC. So far, GMAC is the only automaker in Canada that has officially announced plans to exit the leasing business altogether. My guess is others will follow suit.

In Canada, leasing represents a large segment of the market. According to Desrosiers Automotive Consultants, it accounts for 42 per cent of all vehicle transactions.

Automakers and finance companies are scaling back on leasing for several reasons.

First, the residual values (market values) of leased vehicles have fallen dramatically in the past few months. Used pickups have fallen 11.2 per cent, and used SUVs 9.6 per cent.

When residual values are high, lending institutions can offer consumers lower monthly lease payments, making leasing an attractive option. But when residual values plummet, that loss has to be adjusted into higher monthly payments, which makes financing more attractive.

Second, the residual values of off-lease vehicles have traditionally been insured. Recently, insurance companies have paid millions to cover losses resulting from the devaluation of these vehicles, and so they have ceased offering that type of coverage.

When banks and automakers own vehicles that are worth far less than their market value, it means they lose money. When you consider the financial losses on hundreds of thousands of vehicles, it adds up, and you can understand the decision to get out of that business.

Third, this leasing shakeup was partly initiated by the rise in gas prices. Understandably, fewer consumers want to own gas-guzzling pickups and SUVs, which has reduced the subsequent revalue of those vehicles in the marketplace.

How will the scaling back of auto leases affect Canadian car buyers? If you are leasing a vehicle with Chrysler, GMAC or any other automaker, you are obligated to fulfill your lease requirements.

Once your lease obligations have been fulfilled, you can return the vehicle to your dealership as normal. Or, you can exercise a buy-out option if it makes financial sense to do so. All current lease contracts will be honoured as usual.

If you currently lease a vehicle from a manufacturer other than GMAC, it depends on the automaker. Some automakers may continue offering lease programs, although lease rates will probably rise.

As a reaction to the decline of leases, some automakers and lending institutions are offering long-term financing deals with zero interest in order to keep payments low for consumers.

But if you're leasing a pickup or SUV – regardless of the manufacturer – you can expect its residual value to be lower than it was a few months ago. That's a reality of today's marketplace.

Would I still recommend leasing as an option? In some instances, leasing still makes sense and offers a practical solution for motorists.

What if leasing isn't viable for the type of vehicle you're interested in?

Then you'll need to consider a financing option, which means your monthly payments will be slightly higher, but you will own your vehicle after it's been paid for, along with any equity.

Indeed, the rules of the game have changed, and consumers shouldn't rush into making a decision before reviewing all of their options carefully.

There is more than one type of lease agreement.

Whatever type of lease you prefer, my best advice is to fully understand the terms of the agreement so that you can make the best decision possible.

This column represents the views of TADA. Email: president@tada.ca or visit www.tada.ca.

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