| American car manufacturers, Chrysler, Ford, and | | | | of short-term sales. |
| General Motors (GM), have recently announced | | | | From the consumer's point of view, it's not a very |
| cutbacks or elimination of car leasing programs. Why? | | | | good solution either. With a 72 month loan, they can |
| Because the programs have been money-losers for | | | | indeed get a monthly payment about the same as a |
| them due to unrealistically optimistic residual values | | | | 36 month lease for the same vehicle. However, the |
| (estimated future resale values). High residuals made | | | | 72-month loan buyer will be upside down for most of |
| for attractive low monthly payments. In an attempt to | | | | the loan term, meaning they will not have any |
| increase sales and better compete with foreign car | | | | ownership equity for trading or selling until about the |
| makers, American manufacturers were too | | | | last year of the loan, depending on down payment and |
| aggressive with both leasing and loan programs. | | | | interest rate. Since many people tire of their vehicle |
| American car makers have heavily depended on large | | | | after about three years, these people will find that |
| trucks and SUVs, the very vehicles that automotive | | | | getting out of the loan will be expensive and |
| consumers don't want now. Resale values have | | | | troublesome. Furthermore, since most manufacturers' |
| plummeted on these vehicles. This means that when | | | | warranties, including Chrysler's, expire after three |
| leasing consumers return vehicles leased more than a | | | | years, these people will be exposed to |
| few months ago, the actual resale values are far | | | | out-of-warranty repairs for three more years, for a |
| below the residuals that the leases were based on. | | | | vehicle they have little or no ownership equity in. They |
| When the vehicles are sold, there will be big losses. | | | | will question why they should spend money repairing a |
| These losses will continue for another three, four, or | | | | vehicle on which they have negative loan equity. |
| five years, depending on the the length of the leases. | | | | Another exposure for long-term borrowers is that |
| Consumers holding these leases will be protected. | | | | insurance companies will only pay for a car's current |
| Ford, Chrysler, and GM have announced that, in the | | | | replacement value, not the amount still owed on a loan, |
| future, leasing will cost more than in the past. In fact, | | | | if the vehicle is stolen or totaled in an accident. If the |
| Chrysler has eliminated lease programs altogether, | | | | borrower is upside down, as he would be for most of |
| although Chrysler dealers will have other sources of | | | | the 72 months, the difference between loan balance |
| lease financing. Leasing will continue to be an attractive | | | | and insurance payoff could be thousands of dollars. |
| option for automotive consumers, even if the cost is | | | | Gap insurance is the solution to this problem, but many |
| somewhat higher. | | | | auto consumers don't know about it and won't have it. |
| Asian and European car makers, who are less | | | | Others will question it's value and decide not to buy it. |
| dependent on large vehicles, have not announced | | | | Dealer's may not mention it, either because they don't |
| cutbacks in leasing programs. In fact, because residual | | | | offer it, or because it increases overall cost and might |
| values on smaller, fuel-efficient vehicles will remain high, | | | | cause the customer to balk at the car deal. |
| leasing will be as attractive for these vehicles as ever, | | | | Leasing, on the other hand, is shorter term for the |
| or even more so. | | | | same monthly payment. The leased vehicle is always |
| Chrysler has announced that they will replace leases | | | | under warranty, assuming a three year lease. Gap |
| with long-term loans that produce payments as low as | | | | insurance is automatically included. No down payment |
| shorter-term leasing. They intend to promote long 72 | | | | is required. Even if lease costs increase, which seems |
| month (6 years) loans. They are replacing one problem | | | | to be inevitable, there will continue to be good reasons |
| with another. From their point of view, it might help | | | | to consider it as an alternative to buying, especially |
| move cars, but it takes them twice as long to get their | | | | when compared to long-term loans that American car |
| money back as on a lease. Once again, they are | | | | makers will be offering. |
| mortgaging their future, if there is a future, for the sake | | | | |