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Low used-car prices hurt leasing firms

Slowing economy, glut of SUVs add to dip in residual values

SHARE Low used-car prices hurt leasing firms

DETROIT — An unexpected dip in the price of vehicles coming off lease has translated into large losses for banks and leasing companies.

A slowing economy, aggressive incentives by automakers on new cars and a glut of sport-utility vehicles have all combined to keep prices down in the used car market. That means that estimates made three or four years ago of a leased vehicle's value now can be off by thousands of dollars.

The average loss on end-of-lease vehicles returning to leasing companies rose to $2,592, 55 percent more than in 1998, according to the Association of Consumer Vehicle Lessors. Leasing companies lost money on four out of the five vehicles they took back; losses of several thousand dollars per vehicle are not uncommon.

"Whoever was leasing those cars are basically losing their shirts," said Art Spinella, director of CNW Marketing Research in Bandon, Ore.

Leasing exploded in the 1990s as a way for automakers to improve profits while lowering monthly payments for car buyers and ensure a steady stream of repeat business.

The key to making money on leasing is estimating how much vehicles will be worth at the end of their lease terms. Cars and trucks with higher resale values — such as the Chevrolet Suburban SUV or Honda Odyssey minivan — retain more of their value and therefore can have lower monthly lease payments.

The mileage restrictions on leases — now usually 15,000 miles a year — make sure owners don't take too much value out of their vehicles.

But a number of factors have come together to make backing leases a dangerous business. To get payments lower, the length of leases has been growing; where the average length was two years in the mid-1990s, most are now four years. That makes the guessing game of residual value much harder.

After a boom in the mid-1990s, auto companies saw their leasing losses increase due to poor forecasts of used-car values and pulled back; leasing accounts for a steady 30 percent of new-car sales.

Off-lease cars are a small part of the used car market; of the 40 million used cars expected to trade hands this year, just over 3 million vehicles will be coming off leases.

But automakers have essentially captured customers who would have bought used cars by keeping new-car prices steady over the past few years. And rising incentives on new cars translate to similar price cuts for older versions of the same model.

All this doesn't mean that people leasing their cars or SUVs should expect to throw a lowball offer at their finance company when their leases end and drive off. When consumers decide to buy their vehicles at the end of the lease, finance companies got the expected residual price 4 out of 5 times in 1999, according to the Consumer Banking Association.

The pain from losses appears to be limited to financial institutions outside automakers' own finance companies. This week, the chief financial officers of General Motors Corp. and Ford Motor Co. said they were not seeing large losses from leased vehicles.

"It's not as big a problem for the car companies as it is for banks, because the car companies made money on producing the car," Spinella said. Automakers "made money by keeping their plants running and selling the car when they were new. A bank has to make money on the lease itself."

One big problem is that prices on used SUVs, especially mid-size models, are weaker than other used vehicles as the SUV boom is finally hitting the used-car market.

"We have more supply than ever before," said Tom Kontos, director of strategic planning and market analysis for ADT Automotive Inc., a used-car auction company.

What will likely happen instead is that leasing terms will become a little more generous.