Noise, Vibration, and Harshness: Rise and Fall of Consumer Finance

Tim Marrs

That's because fuel prices and an economic downturn have caused a dramatic across-the-board decline in the residual values of Detroit's gas-slurping finest, leaving the world of automotive finance to grapple with the long-looming consequence of an industry that earned its keep building big vehicles vulnerable to gas price inflation. Dormant liabilities with names like Silverado, Expedition, and Durango have turned overnight into angry, cash-eating zombies that promise to cost Detroit billions.

When lessors overstate a vehicle's likely residual value, innocently or otherwise, they lower monthly payments, but they also take a gamble that the value will be there in 24 or 36 or 48 months. It's a gamble they seem to be losing with frightening regularity, as yesterday's profit morphs into today's loss, each bad lease a nightmare akin to the one average citizens face when they find out they owe more than their car is worth. It's bad enough when you find your own self upside down, but when hundreds of thousands of leases go upside down on you at once, it's worse.

How much worse? Last summer, Chrysler announced it would stop leasing. Period. GM declared its intention to halt leasing in Canada. Like Ford, it plans to charge more for its leases in the United States going forward. Times are tough, boy.

The government says it's not ready to call it a recession, yet, but it doesn't take a proclamation to know that the balloon has sprung a leak. The sour fruit of plummeting residual values reflects the agonizing descent already in progress for domestic makers, while hastening it, too.

When you won't lease the cars you make, you've said you're not willing to bet your own money that they will be worth as much as you say they will in years to come. Whether you can't afford to or you choose not to, either way, you have an effective strategy for not building confidence in your brand. But it's not only the firms' self-esteem that's lacking. Moments after Chrysler announced that it would stop leasing its vehicles, Chase Auto Finance chimed in that it, too, would no longer write leases on Chrysler offerings. And lest anyone get the wrong idea, Wells Fargo let it be known that it didn't want anyone thinking it was writing Chrysler paper anymore, either.

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