Three or four years ago buying a new car was easy. Auto manufacturers were offering all sorts of incentives to new car buyers. Advertisements for zero percent financing and no money down were everywhere, and dealers were more than happy to entice buyers into a bigger, more expensive SUV or truck - often by suggesting they lease instead of buy.
Back then, leases were a great deal. They made expensive cars affordable, because the payment is based on only a PORTION of the cars value - says Gary Adams is the president of the Ohio auto dealers association.
ADAMS: The key factor to figure out what your payment is going to be for a lease is what they determine --or I should say guess --the value of that vehicle is going to be when you turn it in.
And so the higher the value of the car at the end of the lease- something called the residual value - the less *rent* you pay for driving it. But as Adams points out that number is just a guess - and lately - the banks have guessed badly.
ADAMS: Lending institutions were just missing the mark tremendously when it comes to setting that residual value
But while high residual values translate into low monthly payments and good deals for the customer - missing that mark means banks lose BIG. Bernie Moreno runs Mercedes Benz of North Olmsted:
MORENO: Leasing companies that were incredibly overzealously bullish on the values of these used cars 3 or 4 years ago are taking beatings, BEATINGS on these cars.
Trucks and SUV's are taking some of the biggest beatings. Gary Adams explains
ADAMS: They leased a truck four years ago and they said well it's going to be worth 15 thousand when it comes of a lease - well it could be worth 5 thousand because the truck market has gone down so bad - now all the sudden they just lost roughly 10 thousand dollars on that lease.
It's those kinds of losses that have automakers like Chrysler, GM, and Ford scaling back their leasing programs or dumping them entirely. Banks like GE, Chase and Wells Fargo are also jumping ship and other automakers are expected to follow suit. Moreno says the whole industry attitude towards leasing has changed completely
MORENO: 15 years ago you would go to meetings and seminars on how to convince people to lease. Today we're trying to convince people NOT to lease.
Until recently trucks and other gas guzzlers have traditionally been automakers BEST SELLERS -dominating auto sales for more than a decade. But the sudden spike in fuel prices coupled with a downturn in the economy caused sales to plummet and with them used car values. Gary Adams blames the sub-prime morgage crisis.
ADAMS: Your general contracter's not buying a truck anymore. The dry waller the carpenter, the electrician, the concrete guy, right - the landscaper. None of those are buying trucks. The housing market is really what destroyed the truck market.
But regardless of who's to blame, in the current reality it's the would-be car shopper who's going to take the beating next. Mercedes Benz still offers leases, but they're not the deal they used to be. Lenders now require better credit scores, more money up front, and have lowered residual values to protect themselves. And consumers are paying the price for that protection - in the form of higher monthly payments and few options.
Gretchen Cuda, 90.3