Chrysler Kills the Auto Lease
July 29, 2008
Leasing was the slightly more benevolent version of “planned obsolescence,” which almost ruined the industry in the 1970s.
Throughout the last 20 years or so, it has become increasingly hard for the average person to finance the purchase of a car over a reasonable period of time (less than 3 years) without a significant initial cash outlay. About a quarter of the national market leases cars instead of buying them, because even though they might never have the joy of owning a car free of encumbrance, they’ll also never have the Russian-roullette-like joy of replacing rotors, spark-plug wires, batteries or transmissions. They were content with a more-or-less perpetual payment, in return for always having a new car that was under warranty.
This is why I thought it was a rumor, when I heard that Chrysler (and probably to be followed by others) will discontinue leasing as a financing option starting tomorrow.
Then, an e-mail hit my in-box from Chrysler.
We are contacting you to let you know that recent press announcements about Chrysler and Chrysler Financial no longer offering leasing do not change our commitment to you. We’ll continue to provide our lease customers a superior vehicle ownership and finance experience.
The e-mail directs the reader to a website, predictably dripping with spin:
Effective August 1, Chrysler Financial will discontinue offering new lease products in the United States and is shifting its resources to offer customers new enhanced installment loans. This announcement is based on broader industry and economic trends that have made leasing less favorable for our customers.
Less favorable for your customers?
If leasing were truly less favorable, and financing more favorable, from the customers’ points of view, you wouldn’t have your back to the wall issuing damage-control counter-press-releases at 11pm on a Tuesday.
No, the broader economic trends have made leasing less favorable for the automakers’ financing arms; determined to “make it up in volume,” they have flooded the market with heavily incentivized leases over the past few years. As all those leases expire, the used car lots are flooded with gently used, 2- and 3-year old vehicles with relatively low mileage. The glut of supply over demand caused prices on used cars to decline. And if you haven’t figured it out by now, used cars are a near-substitute for new cars. Sur-fucking-prise: the relative abundance of used cars has put tremendous downward pressure on automakers struggling to sell new cars.
Really? Their economic model couldn’t account for this?
They should have been charging more for leases, in order to accurately account for the depreciation (which is what a lease is designed to do). Of course, that would’ve resulted in moving fewer vehicles off the lot. But their economic model failed to predict that as they dumped millions of cars on the market, the buy-back price of those vehicles two or three years hence whould drop, significantly. To be fair, there are other factors at play here, like the rising cost of gas, a recession, stagnating wages and high unemployment, but I’m not sure how any of these contribute to the favorability of putting 10% down on a rapidly depreciating asset, just to be saddled with $500 monthly payments for the next 3 years.
The market is oversupplied enough to permit relatively destructive competition in the lease market, there’s little reason to believe that traditional financing will not be similarly affected. There are simply too many cars, and too much productive capacity (not to mention, not enough disposable incomes) to tolerate the prices emblazoned on window stickers at car lots across the country.
This was a no-brainer, which should have only become more apparent as the perfect financial SNAFU came to a head over the past 24 months:
Manufacturers have been flooding the market with deeply-discounted trucks, or promo-rates on leases with little or nothing down. When those leases all begin to expire at about the same time, there will be a glut of used trucks in relatively good condition on the market, this glut should tend to force prices downward.
No matter which way you spin it, the prices charged for new vehicles are going to have to fall, and unless the automakers can figure out how to make that work to their advantage (it’s not like they have a captive market in Auto-Financing - every bank and credit union issues new-car loans), killing the lease option isn’t going to be enough to stop the bleeding.
Related posts:
- Nowhere to Go but Down
- Government Graft & Automobiles
- Peoples Republic of Cali v. Big Auto
- Will the Auto Bailout Be Repaid?
- Big Auto, Big Trouble
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