Sunday, August 05, 2001

Leasing popular, but complex




By John Eckberg
The Cincinnati Enquirer

        Leasing continues to grow in popularity in North America with more than half of all new cars acquired in Canada being leased vehicles and about 30 percent leased in America.

        But leasing is complex and can be confusing.

        In most lease contracts, the lessor is an independent leasing company or a finance company such as a bank that buys a vehicle from a dealer or manufacturer, according to Automotive Lease Guide, a privately held company in Santa Barbara, Calif., that has established residual vehicle values for 35 years.

        Vehicles leased to consumers mean that somebody has acquired the right to drive the vehicle for the duration of the lease while a dealer has acted as an outside agent for the leasing company by negotiating terms for the vehicle's use.

        A lease differs from a purchase because in a vehicle purchase loan, the consumer repays the unpaid purchase price through one down payment and monthly payments.

        With a lease, when the lease is completed, a residual value remains, which the lessor can pay and then own the vehicle or he can walk away with no more obligation.

        Projecting residual values has been a challenge for financing companies.

        While inflated residual values made payments lower for consumers and sparked leasing in the 1990s, it led to big losses for financial institutions.

        “Last year, banks, credit unions and credit companies combined lost about $11 billion on leases from mis-forecasting residual values of vehicles. It was a record year,” said Art Spinella, vice president and general manager of CNW Marketing Research, Bandon, Ore. firm that researches consumer spending, including automobiles.

        “The projection in losses in 2001 is closer to $10 billion, but that is still a huge number,” he said.

        One result is that some independent lease companies such as GE have stopped leasing vehicles.

        “ATT was another large leasing company, and they simply got out of it,” Mr. Spinella said. “They don't lease cars to people anymore. And many banks have started to pull back.”

        Mr. Spinella said the Swapalease business model is “clever — great idea.”

        “In all our leasing research, the one area people liked least was that they could not get out from under a large contract without incurring a large penalty,” he said. “I guess it took a car dealer to come along and figure out how to do it.”

Swapalease.com lets car leasers connect



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