Will You Be Able to Lease Tomorrow?

The words sent shockwaves through the car industry. Chrysler LLC and its “captive” finance company, Chrysler Financial, recently decided to drop leasing from their portfolio of finance options, potentially turning their back on 20 percent of the car-buying public, which currently leases its vehicles. Is it an anomaly or a trend?

Time will tell on that score, but it wouldn’t surprise industry observers if the Chrysler move signals a pattern that other car manufacturers -- notably the beleaguered domestics General Motors and Ford Motor Company -- may soon follow. Why? Because in the current market, credit is tight and expensive, and residuals are unpredictable. It is the latter of these two issues that has really prompted Chrysler’s move away from leasing. Predicting the residual value of a vehicle -- essentially its resale value -- two, three or four years hence has always been a tricky business. In the hands of captive finance companies owned by major manufacturers it is even trickier because their corporate cultures might influence their analysts to be more liberal about residual values than they should be.

Here’s the reason why: By predicting strong residual values, financial institutions can make monthly payments lower, given the same interest rates, and this in terms spurs more leases to be written and more cars and trucks to be sold. It all works just fine in an environment in which used-car values meet or exceed those predicted residuals. The car company sells more vehicles; the financial institution makes money on its leases; and the consumer comes out well, too. But it all goes south in a big way in the kind of car and truck market we’ve experienced lately.

The recent quick run-up in gasoline prices sent values of used trucks, sport utilities and other large vehicles tumbling into the sewer. Vehicles coming off lease and going into the hands of financial institutions, like Chrysler Financial, are possibly worth thousands of dollars less than the value that was predicted for them. This means losses -- potentially very heavy losses -- for the financial institutions that own those cars. So perhaps it is natural for companies like Chrysler to desire to exit that business altogether. Multimillion-dollar losses can do that to you.

This does not mean that you won’t be able to lease a Chrysler, Dodge or Jeep brand vehicle from one of those brands’ respective dealers. It does mean that those leases will be backed by financial institutions other than Chrysler Financial. The sad news for consumers is twofold. First, those leases that are written in the future will probably be structured with more conservative estimates of the vehicles’ residual values. This means higher monthly payments, all other things being equal. And, just as important, it also likely means the end of factory-subsidized leases from the Chrysler brands, which are the kinds of lease deals that are often heavily advertised because their eye-poppingly low monthly payments spark sales.

If you are currently leasing a vehicle from one of the Chrysler-owned brands, there is no reason to worry. Your contract won’t be rescinded. Chrysler Financial has assured all that it will continue to support and service current Chrysler, Jeep and Dodge lease holders. But as the pendulum swings back in favor of purchasing and financing, there are some pitfalls to look out for. The end of leasing might spur the introduction of some nonconventional financing deals that will offer the same level of low payments that leases do now. The major difference is that these new financing instruments will seek to limit the financial institution’s risk based on future value of the vehicle and put it directly on the shoulders of the consumer. Be wary of a loan that calls for low monthly payments over the course of, say, 36 months, but then requires a “balloon payment.” While the sale of the vehicle might be enough to fund that balloon payment, it also might not, and you might be looking at a substantial dollar outlay that you didn’t bargain on.

So the Chrysler Financial move away from leasing signals the end of an era. Just make certain the new era doesn’t have negative financial consequences for you. As always, only looking at the monthly payment is a very nearsighted way to view a vehicle acquisition deal.