Detroit's money troubles are starting to put a key part of the American dream -- a pricey new car -- out of reach for some people.
Squeezed by falling used-vehicle prices, as well as continued tumult in the credit markets on Wall Street, Ford and General Motors are significantly scaling back their auto-leasing business.
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Ford this week began telling dealers that it is essentially ending leasing deals on most trucks and sport-utility vehicles. GMAC, GM's financing arm, is also expected to soon rein in leasing offers in the United States. On July 29, it said it will no longer offer subsidized leases in Canada. Chrysler last week said it is ending all leasing deals in the United States.
Leases at the Big Three automakers account for about 20% of their total new-vehicle business, according to Automotive Lease Guide.The rise of hefty auto incentives -- including subsidized leases -- came amid the same broad expansion of easy borrowing in the 1990s and 2000s that buoyed American housing prices. Now, in both houses and autos, the previous virtuous circle has yielded to a vicious one, with prices falling and credit growing tighter.
Banks are also turning their backs on leasing as falling used-car prices make the business less profitable.
The auto-finance unit of Wells Fargo has also told dealers it will no longer finance leases beyond July. In reaction to Chrysler's announcement, Chase Auto Finance, a unit of JPMorgan Chase, decided it will no longer provide lease financing for any Chrysler, Dodge or Jeep models.For years, leases have made it possible for millions of Americans to drive newer, more expensive cars than their budgets might otherwise let them buy.
In a lease deal, the vehicle is owned by a bank or a finance unit like GMAC, and the customer merely rents it, usually for two or three years. That keeps monthly payments lower.
Automakers, for their part, loved leases because they could sell higher-priced vehicles, which generate more profit.Leases aren't disappearing entirely. Japanese and European automakers aren't in the same bind as the Big Three in the leasing business, and some lenders such as credit unions continue to offer lease deals, though the terms are likely to tighten.
For the Big Three, the pullback from leasing is likely to further cut into vehicle sales, and could help foreign automakers win over customers. Chrysler and Ford said leasing accounts for about 20% of unit sales in the United States. For GM it's about 40% of the retail sales financed through GMAC.
By piling on incentives of their own, such as rebates or 0% financing deals, automakers are able to subsidize consumers' lease payments further. As a result, Americans have been able to get into vehicles their parents never imagined driving -- from tricked-out trucks costing $40,000 to $50,000 to luxury sedans and sport cars that list for tens of thousands of dollars more.
For Richelle Babcock, a mother of two young boys in Ann Arbor, Mich., leasing has made it possible to get new cars every couple of years. A few years ago, she took advantage of a trade-in deal and other incentives Chrysler was offering and got a $180-a-month lease on a 2006 Jeep Commander with a sticker price of about $35,000.
There's "no way," Babcock says, that she would have bought the Commander outright. "I don't want to have to own it and drive it forever," she said. Indeed, in December she turned it in and instead leased a new 2008 Commander. Her payment roughly doubled, but that's mainly because the lease is much less restrictive about her annual mileage.