In the past couple years, two waves of an economic tsunami slammed into the auto leasing equation and put leasing company profits deep underwater. The first wave rolled in when defaults on mortgages and credit card debt increased, making it much tougher to qualify for a lease and pushing up the price of money (interest rates). Many car manufacturers chose to pick up some or all of this financing cost to help keep cars moving off dealer lots, so the pain was masked to some extent. But the second wave was huge! The explosion in fuel costs suddenly made vehicles which burned more than a gallon every 20 miles less desirable across the land. With many buyers shifting to smaller, less fuel hungry transportation, sport utility vehicles and pickup trucks dropped about 25 percent in value overnight. Our example SUVs $30,000 resale value slumped to between $20,000 and $25,000. Now the money the customer paid back over the term of the lease, combined with the new lower resale price, totaled substantially less than the amount the leasing company had paid the manufacturer for the new vehicle. Bummer!
Faced with the reality that it is not possible to lose money on every deal and make it up in volume (though not for lack of trying), the leasing companies decided to pull the plug. Unfortunately the pain is almost certainly going to continue for some years to come as leases written recently by the finance arms of GM, Ford, and Chrysler continue to carry optimistic residual value figures. Of course generalized finance companies such as banks and credit unions continue to offer leases, but their numbers reflect the new market reality and the previous advantage over purchasing, of lower monthly payments, is either minimal or non-existent. U.S. manufacturers are now pushing the benefits of purchase over lease, hoping they can use other promotional techniques to keep their lease customers. It'll be a difficult and expensive effort, made even tougher by the imports. In the end, to stay in business, you gotta make money.