Leasing Losing Luster

For many car buyers, leasing has been the most practical way of obtaining a new vehicle. Most people prefer this way of purchase, because it includes monthly payments, as oppose to paying in full in one shot. This is usually the better option for a buyer, because leasing is based upon the concept that a buyer pays a dealership the difference between a vehicle's original value and its value upon termination of the lease term, which generally ranges anywhere from 2 to 5 years. This end value is referred to as a vehicle's residual price, and it varies between different makes and models. Vehicles with the lowest depreciation value, or the least difference between original value and the residual price, are generally the best candidates for a lease option.

For instance, in a 2-year lease, the customer would agree to pay the difference between the car's full value at the time of the lease and the estimated value 2 years later at the end of the lease term. If a vehicle's MSRP (Manufacturer's Suggested Retail Price) is $30,000, and its estimated worth after 2 years is $20,000, the buyer would pay $10,000 over a 2 year period, plus interest. Most leases place explicit limits on yearly mileage and the amount of acceptable wear and tear, and any excess can result in additional payments. At the end of the lease, the lessee has the option to either return the vehicle to the dealership with payment of any accrued charges, or to purchase the car for the residual value.

However, with the current economic downturn, automobile leasing has begun to lose its appeal. Leasing generally allows customers to obtain a car which would normally be outside their budget, and it's become even less desirable than before to commit to a financial obligation which really can't be afforded. Leasing has also lost its luster for car manufacturers due to increased gas prices, which has made the formerly popular option of leasing the more expensive trucks and SUVs undesirable to customers due to their gas-guzzling nature. As a result, the residual value of these pricey vehicles has decreased, causing lessees to decline the option for purchase at the end of a lease term, while retailers take the loss, which amounts from the difference between the estimated residual value and the actual residual value. The bottom line is that car manufacturers can no longer afford to offer lease options, and customers can no longer afford to make financial obligations that formerly allowed them to live above their means.

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