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Gas, Credit Crunch Put Dent in Lease Deals

Major companies announce leasing cut-backs, cost increases

By Joe Benton
ConsumerAffairs.com

July 30, 2008
Two of the largest automobile financing groups in the U.S., GMAC and Ford Motor Credit, plan to cut back on auto leases while increasing the cost of a lease.

Chrysler Financial has decided to get out of lease financing altogether.

The moves could drastically change the way consumers buy cars and trucks. About 20 percent of all new vehicles are leased, down from of more than 30 percent in the late 1980s. The leasing percentage is much higher for more expensive vehicles such as SUVs and luxury cars.

While the finance companies are cutting back on leasing to reduce the risk from losses on lease deals, the moves could also increase the cost of year end deals available to consumers.

Automakers are accustomed to using leasing as a method to clear inventory by enticing consumers with lower monthly payments. The year-end deals hinge on the leasing company being able to sell vehicles for near their forecast residual value when the contracts are up.

U.S. automakers and their financing companies have been losing money on leases because of the sharp decline in the resale values of trucks and SUVs due to record gasoline prices.

Ford took a charge of about $1.8 billion in the second quarter of the year for the lower resale values of trucks and SUVs coming off leases after terms that usually run three years.

Because of the sudden premium on more fuel-efficient cars, resale values for light trucks have dropped by as much as 30 percent or more over the last year.

To help combat losses, Ford plans to raise lease prices on certain trucks and SUVs to the point where leasing the vehicle may not make economic sense.

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