Increase in leasing comes with overestimated residuals

Increase in leasing comes with overestimated residuals

As automakers ramp up leasing, they are overestimating residual values so much that they are on track to repeat the mistakes of the late 1990s, says CNW Research.

To make lease deals more attractive, automakers want to offer low monthly payments. To do that, they often peg the residual at a higher value – in many cases 5 to 10 percent higher than the market would warrant. CNW estimates that anything higher than 10 percent will become a financial burden for automaker lessors at the end of the lease term.

The industrys lease contracts have been overestimating residual values by roughly 14 percent this year, with major increases in September and October of 15 and 18 percent, respectively, says CNW president Art Spinella.

Leasing has many advantages: the increased loyalty rate to both dealer and automaker, and the way it virtually guarantees the return of the customer to the dealership for a replacement vehicle at the end of the lease term. Whats more the lease vehicle will likely provide the dealer with a certifiable used vehicle.

Incentives are rising throughout the industry for both leasing and buying – up 17 percent from a year ago, says CNW. Spinella says the industry had to pay more than $10 billion from 2000 to 2002 because of overestimated residuals and lowered money factors.

Download Bulletin PDF