If you're looking for an indication — however modest — that the economy is turning around, here's one: Last week, Chrysler announced that it is back in the leasing business.
In August 2008, Chrysler dropped leasing entirely. "And it hurt us some," says Mike Smith, owner of Orlando Dodge-Chrysler- Jeep. "Leasing isn't a huge part of our business, but there's no doubt we've lost some customers because we weren't able to lease vehicles."
In some markets — Detroit and Los Angeles, for instance — leasing was a huge part of Chrysler's business. Some dealers have said they lost as much as half their volume when the company quit leasing.
So why did Chrysler drop out in the first place? For one thing, says Smith, the company's leasing arm, Chrysler Financial, was strapped for cash. Now Chrysler uses General Motors Acceptance Corp., or GMAC, and they are better prepared to handle leasing.
That said, if Chrysler had been making money on leasing, the company would have found a way to continue it, but it wasn't. Here's how leasing works for a car company: It takes a vehicle that retails for, say, $25,000. Then, for a set lease period — say, 36 months — the company tries to determine what a reasonable lease rate would be, after a down payment.
Suppose, then, that the customer pays, over 36 months, $10,000 to lease the car. When the car is returned to the dealer, it typically goes to auction. And suppose the car sells at auction for $7,500. In essence, then, Chrysler would have sold a $25,000 car for $17,500. In calculating the lease payments, Chrysler guessed wrong on the car's "residual value" after three years. Had that car still been worth $12,000 at auction after three years, plus the $10,000 lease payment, the company would have come out well. But the cars were losing value faster than Chrysler predicted.
Why was that? Chrysler, like so many manufacturers, kept building more vehicles than it could sell. The only way to move those vehicles was to discount them heavily. And when the value of those new cars plummets, so does the value of the cars that were leased.
Now, obviously, Chrysler has some confidence in the future. Like the other manufacturers, Chrysler cut production, and the "cash for clunkers" program helped clear out inventories. In fact, Mike Smith says one of his biggest concerns right now is getting enough new vehicles to sell. Two years ago, that was not a problem.
Leasing has remained popular with brands that have more predictable resale values, such as BMW and Mercedes-Benz. Typically, the list of the top 10 most-leased cars are all European. Resale value is just one part of that — the other is that European brands are often expensive, and for those who want a new luxury car but can't afford to buy one, leasing is the only other way to go. The 2009 Mercedes-Benz SLK 300 sports car, for instance, starts at $45,950, but Mercedes leases it for 36 months at $499 a month, with $4,844 down. BMW will lease you a $47,500 X5 for $539 a month for 36 months, with $5,814 down, and $1,700 cash back. Leasing remains the way to go for many commercial customers, too, especially heavy-duty vehicles and work trucks.
So now expect Chrysler to push leasing for all its 2010 models, with special lease incentives through the end of the month on the Chrysler Town & Country and Dodge Grand Caravan minivans, the Dodge Ram 1500 pickup, the Dodge Journey SUV, and the Jeep Wrangler and Liberty. Leftover 2009 models are not part of the leasing program.
"For some customers," Smith says, "leasing makes a lot of sense — maybe their tax adviser tells them to lease, or they just like the smell of a new car every couple of years. Either way, I'm glad it's back."
Sentinel Automotive Editor Steven Cole Smith can be reached at scsmith@orlando sentinel.com, at 407-420-5699, or through his blog at Enginehead.com.