Sticker shock? Try leasing!

August 05, 1994

For years consumers have been experiencing vertigo at the eyeball-popping sticker prices on automobiles in new car dealers' showrooms. Since 1989, new car prices have been rising well ahead of personal incomes, putting that dream machine out of reach of many prospective buyers.

To avert a crippling slump in production, carmakers resorted to all sorts of novel schemes to keep sales up, including leasing. But now there are signs that the huge investment automakers have sunk into leasing arrangements may permanently alter the economics of the car business.

The idea behind leasing was supposed to be simple. Instead of financing the full purchase price of a new car through a bank or RTC finance company, buyers in effect paid for only the first two or three years of the car's value. At the end of the lease they could turn the car in and walk away, buy it for its used-car market value or trade it in for a new model. If the actual used-car market value was higher than the "residual" value calculated by the manufacturer, some leases even allowed the customer to sell the car, pay off the lease company and pocket the difference.

For the buyer, leasing meant more car or a lower monthly payment compared to full-price purchase. For the manufacturer, meant higher prices for new vehicles without reducing sales volume. Though leasing schemes originally were most popular for affluent consumers of upscale luxury cars, the trend quickly caught on among mid-price and economy car buyers as well.

But now the first big wave of two- and three-year leased cars is coming back to dealers' showrooms and automakers, who traditionally focused on the new car market, are finding that used-car sales now constitute an increasingly important part of their business. Over the next few years, nearly 8 million &r high-quality two- and three-year-old used cars will come onto the market. Manufacturers are counting on them selling at good prices, and some even plan to lease second-hand cars, too.

What these developments point to is a revolution in Americans' love relationship with the automobile. Some analysts believe the competition between manufacturers to offer ever more attractive leasing arrangements eventually will make car-buying virtually obsolete. Already companies such as Ford Motor Corp. are contemplating long-term, 12-year leases that give buyers the option to get a new model every two years and simply keep the last car when the lease expires. If Ford is successful, you can be sure other makers will follow. And the car market will never be the same again.

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