Facing huge financial exposure on leases, automakers are furiously punching calculators to rework lease numbers. With truck values going down, lease payments must go up to ensure car companies make money.
What if I told you that you could have free gasoline? Not just a fill-up, but enough free unleaded to drive to work and take the family to grandma’s for years? Sounds impossible, but it’s simple. If you’re leasing a new car every three years, stop. Instead, adopt the long-term strategy that works best in the stock market: buy and hold.
I’ll explain the math momentarily. But what got me started on the age-old buy vs. lease conundrum was the near overnight transformation of the car business. Chrysler’s stunning announcement that it would get out of leasing entirely is just the latest falling domino that traces back to $4-a-gallon gas and havoc in the SUV market.
Chrysler was finding leasing so financially unpalatable that it hung a Gone Fishin’ sign over its lease operation. Ford, for its part, intends to make some truck models “lease proof,” boosting monthly payments so high that customers are forced to buy instead — if they buy at all.
That’s what happens when Ford loses $8.7 billion in just three months — $2.1 billion of that loss due to plummeting lease values. When Ford wrote the leases, these were desirable trucks. Now they’re coming back as white elephants, worth billions less on used-car lots than Ford originally calculated.
Even Toyota has been nailed by lease losses, though it hasn’t revealed how much. Some of the biggest SUVs, from the GMC Yukon to the Toyota Sequoia, are now on track to lose 60 to 70 percent of their original sticker price in just three years. In other words, a $40,000 SUV might be worth as little as $12,000 three years from now. Those projections, from Automotive Lease Guide (ALG), are used by automakers to figure out what to charge for lease payments.
Now if you leased a big SUV a few years back you’re feeling pain at the pump, but at least you can sleep at night not having to worry about trading it in. Automakers aren’t sleeping well at all. Facing huge financial exposure on leases, they’re furiously punching calculators to rework the numbers. With truck values going down, lease payments must go up to ensure that car companies make money.
While Chrysler has dropped leasing entirely, Toyota, GM and other majors have vowed to stay in the game. But expect every automaker to boost lease prices on larger SUVs and pickups. For consumers who are still determined to lease a pickup or SUV, now’s the time to move, before prices get out of hand. ALG has calculated that an SUV that leases for $500 a month might climb to $700 a month by fall.
Discuss: Will you give up leasing and buy instead?
John Blair, CEO of ALG, urges consumers to keep an eye on the “cap cost” of a lease, or the price of the car that you’ve negotiated with the dealer. Keep in mind that desperate carmakers are chopping more than $8,000 on average off the sticker price of a big SUV. Consumers need to make sure that same hefty discount — or close to it — is being applied to your lease to make payments somewhat manageable.
