Used-car leasing moves toward three-tier market

NEW YORK — NEW YORK -- Here's a glimpse of the future for buyers of used -- er, I mean, pre-owned -- cars. Like new-car buyers, you may start to lease instead of own.

The industry is preparing for a three-tier used-car market: clunkers at the bottom, traditional used cars in the middle and, at the top, 2- or 3-year-old cream puffs, renamed "pre-owneds," which you can lease. Leases require lower monthly payments than if you took out an auto loan.


Right now, used-car leasing is in its infancy. It's most often offered with luxury cars, which might cost $30,000 or $35,000 even when they're 2 years old.

Over the past year, however, the financing arms of Ford and General Motors have expanded their used-car leases to cover well-maintained cars that haven't been driven more than about 15,000 to 45,000 miles (depending on the age of the car). So have Toyota, Mazda and Chase Automotive Financing. Both Nissan and Mitsubishi are considering a similar program. Chrysler isn't in this marketplace yet.


Not all dealers for Ford, GM, Toyota or Mazda make these leases available. But the manufacturers are starting to promote them, so dealers will be ready if consumer demand picks up. "The used-car side of the dealerships is 10 to 15 years behind the new-car side as far as understanding leasing is concerned," says Randall McCathren of Bank Lease Consultants in Nashville, Tenn.

Ford started its used-lease program in February. You can get one- or two-year leases on low-mileage cars and trucks up to 3 years old. They come with limited warranties lasting up to two years, as opposed to the usual 30-day warranties on used cars. Lessees also become members of Ford's Auto Club, which includes free roadside aid.

"The biggest concern people have about used cars is that they don't know the car and they're uncertain about how solid it is," Mike Jordan, executive director of sales operations, told my associate, Louise Nameth. "With the two-year warranty and the roadside assistance, we're addressing that."

The internal interest rate on Ford's used-car lease is exactly the same as the rate on the new-car lease, Jordan says. Some other lessors charge used-car customers more. Dealers that charge higher rates for their used-car leases, however, may accept customers whose credit isn't quite as good.

GM rolled out its leasing program last summer, for cars and trucks up to 3 years old. You can lease for one to three years, but there's no special warranty. The interest rate is one percentage point higher than the rate in a new-car lease, McCathren says.

Toyota's program started last October. In the middle-price ranges, leases are offered only on cars that have been in various types of rental programs. They're up to 1 year old, and have been driven for 20,000 miles or less. You get the new-car lease rate on leases that can run for 24 to 48 months, which Toyota thinks is the longest in the industry.

Toyota also finances leases for its luxury Lexus. A dealer can "certify" a Lexus. A certified car is completely reconditioned and leased with a one-year warranty. These cars generally carry a higher price.

In March, Mercedes started offering two-year warranties with its used-car leases. Mazda's new program claims significantly lower fees than the competition's.


Despite all this activity, "used-vehicle leasing, as a market, isn't there yet," says Terry Sullivan, spokesman for General Motors Acceptance Corp. Manufacturers have been aggressively subsidizing new-car leases -- bringing down the monthly cost for people who lease for just two or three years. As a result, it might cost only $10 to $50 a month more to lease a new car than a used car -- which would probably lead you to choose the new car, instead.

What's more, there's strong demand from buyers for high- quality, low-mileage used cars. So dealers have no trouble getting rid of them.

Starting next year, however, the new cars driven on two-year leases will start coming back to the dealerships -- so the number of used cars for sale will rise. If the supply exceeds demand, prices will fall. It's to forestall that risk that manufacturers are promoting used-car leases, in hopes of attracting more customers. Generally, you'll find it easier to qualify for a used-car lease than a used-car loan.