Drive an Expensive Import? You Probably Lease It

Leases are falling out of favor, which is bad for import brands. They depend on leases to put people in cars they otherwise couldn't afford

by Jim Henry

• View Slide Show

Upscale brands like BMW (BMWG.DE), Saab, and others are cutting back on leasing for some of the same reasons Chrysler quit leasing outright, effective Aug. 1. Ford Motor (F) and General Motors (GM) have also said they are taking incentive money out of leasing and putting it toward cut-rate loans and cash rebates.

Leasing is more important to luxury brands, having helped finance a luxury-car boom since the early 1990s. Luxury leases will still be available, but as discounts on new leases go down, monthly payments and down payments on leases will go up.

Most-Leased Car: BMW

"We are still very committed to the leasing business," said Daniel DeChristopher, vice-president for sales and marketing at BMW Group Financial Services. Four out of the top 10 most commonly leased vehicles in the U.S. auto industry are BMWs, according to J.D. Power & Associates' Power Information Network (PIN). (Like BusinessWeek.com, J.D. Power is a unit of The McGraw-Hill Companies (MHP).)

Nevertheless, through Sept. 2, in addition to leases, BMW is offering 0.9% APR loans on almost its entire 2008 lineup, to make room for 2009 models.

"There's an amount of risk involved [in leases] where we see the used-car market. We're a little more exposed. We certainly remain committed to leasing, but we are trying to shift," DeChristopher said.

BMW is more than a little exposed to leasing. According to PIN data, the flagship BMW 7 Series sedan (BusinessWeek.com, 4/16/07) is No. 1 on the list of most leased vehicles, at 85.3% lease penetration. That is, 85.3% of the 7 Series customers from Jan. 1 through Aug. 10 leased their cars. The rest took out a loan or paid cash.

That's an extraordinarily high percentage of leasing, compared to industry standards. For the whole U.S. industry, leasing accounted for only about 19.7% of retail volume in July vs. 53.8% loans and 26.5% cash. The "cash" category includes all buyers who paid outright for their car. That includes some who may have gotten a loan someplace other than the dealership, like a credit union or a home equity loan.

When You Can't Afford to Buy It

This is the way leasing works: The customer in effect borrows the difference between the up-front cost of the vehicle, minus what it's worth at the end of the lease, usually called the residual value. Obviously, that yields a lower monthly payment than having to borrow the entire cost of the vehicle.

Leasing is attractive for more expensive, aspirational brands, where customers may want to stretch their budget to obtain a pricier car than they would normally buy, if they had to buy it outright.

"There are always going to be people who need to lease," said Jesse Toprak, executive director of industry analysis for Edmunds.com.

Leasing is also attractive for the car companies and their dealers because it brings people back to the dealership for service, to turn in their car at the end of the lease, and for another new vehicle.

John Blair, CEO of Automotive Lease Guide, said he couldn't imagine luxury brands doing without leasing. ALG, based in Santa Barbara, Calif., maintains a commonly used industry benchmark for setting residual values.

"They might not be as aggressive, and payments may go up a little bit, but it's such a main part of the selling strategy for luxury vehicles.