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As interest rates rise, so does leasing

November 18, 2010

More car shoppers are opting to lease rather than buy as rising interest rates make loans more costly. About 20 percent of new vehicles were leased rather than purchased in March, the highest rate since 2001, according to Edmunds.com.

 

At the same time, dealer financing on new-car purchases has gradually been falling, reflecting in part the shift to leasing. The average interest rate for loans on new cars rose to 8 percent in March, up from 6.4 percent in March 2003, Edmunds.com reported.

 

But higher interest rates weren’t the only reason for the shift to leasing. Others:

 

  • Better used-car values. The best leasing deals are usually on cars that hold their value when sold as used. Lately, overall used car values have been stronger after bottoming out from 2000 to 2004.
  • Fewer new-car incentives. With automakers cutting back on deals on new vehicles, more shoppers are lured into leasing. "Leasing does very well when manufacturers cut back on rebates and incentives," said Scott Painter, CEO of Zag/Autoland, an auto buying and financing service for credit unions. In March, purchase incentives on new vehicles were down 9.6 percent from March 2005, Merrill Lynch reports, to an average of $2,635 a vehicle.
  • Automaker deals. Some makers, including BMW, Audi, Jaguar and Honda, are promoting leases, says Edmunds.com industry market analyst Mike Chung. Even Mini Cooper is available for lease. Incentives on leasing deals are the highest since the automotive research website started tracking them in 2002, he adds. Lease deals aren’t seen as diluting new-car values in the way big incentive packages on purchases do.

 

"This is a good way to retain their good brand image while still offering deals to consumers," said Chung. Plus, leasing deals are something new after non-stop sales promotions. "Finally, after two or three years, it’s something new to talk about," says Raj Sundaram, president of Automotive Lease Guide.

 

At Honda, leasing has "always been part of our strategy," says spokesman Sage Marie. A new Honda Accord V-6 has a sticker price of $27,300, but can be leased for a $999 down payment and monthly tab of $289 for 36 months.

 

  • Popularity with dealers. Dealers view leases as a good way of building customer loyalty. With up to 70 percent of those who lease becoming repeat customers, Jerry Seiner, who sells General Motors and other brands at four locations in the Salt Lake City area, said he would "absolutely rather have them lease" than buy. Plus, he says, he gets a steady supply of high-quality used cars from the leasing returns.
 

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