July 21 (Bloomberg) -- When Adam Gilgis leased a Volkswagen GTI this month, he had one goal: a low monthly payment.
“We pay $320, which is perfect,” said the 35-year-old Chicago attorney. “If we finance the car, we’re paying thousands of dollars more over the course of several years.”
Auto leasing is back in a big way as automakers including Volkswagen AG and General Motors Co. pull back on discounts and rebates and entice Americans with ads promising cheap leases instead. So far this year, leases have accounted for about 27.7 percent of new-auto sales, according to Edmunds.com, the highest rate in years. Buyers like Gilgis shun long-term loans associated with outright purchases because increasingly they see cars as smartphone-like gadgets to be upgraded every few years.
“Like an iPhone, one can get a new vehicle with all the new technology and have a similar payment as before,” said Jessica Caldwell, an analyst for auto researcher Edmunds.com.
The recent surge in leasing is helping power U.S. auto sales, which are headed for the biggest year since 2007, when 16.15 million vehicles were sold. In June, five of the top six automakers beat analysts’ sales estimates. Lenders’ willingness to offer loans that stretch as long as eight years also is boosting sales. Terms of 73 to 84 months accounted for 24.9 percent of all sales in the first quarter, according to data from data services group Experian Automotive.
Leasing was once considered tacky and financially frivolous, letting posers drive cars they could ill afford.
“Thirty years ago, if you rolled up next to someone riding in a BMW or a Porsche and you said ‘that car is leased,’ it was one of the biggest insults you could throw at someone,” said Mark Wakefield, a managing director at AlixPartners LLP. “Now, you’d say, ‘Yeah? So, what?’”
Attitudes began changing in the late-1990s, when mainstream buyers began leasing family sedans from Honda Motor Co. and Toyota Motor Corp. Now, with the economy improving and the financial crisis receding in the rear-view mirror, leasing is gaining traction once again. Automakers and banks are piling in because they’re betting that a robust used-car market means leased vehicles will hold their value after they’re returned. The higher the “residual value,” the less the car depreciates during the lease and the less consumers pay per month.
Drivers often weigh the cost of leasing versus taking out a loan and buying a car. With a 20-percent down payment on a Toyota Camry SE priced at $23,740, a 60-month loan costs an average of $341 per month compared with $207 for a 36-month lease, according to a TrueCar analysis.
Non-luxury buyers are leasing at a pace not seen since the late 1990s. Advertising consultant Drew Ament and his wife leased a Kia Sorento for $450 a month for 36 months in February.
“It’s good for me knowing that the lease gives her peace of mind,” said Ament, who lives in Phoenix. “I’m a guy who will get a car and then drive it until it’s dead. I have a Chevy Silverado right now that I’ll probably have until it’s done. My wife can’t do that. So, I pretty much give her a budget each month, and if it’s under that budget, then go for it. And she gets the most for her money.”
He’d rather not have a monthly payment, but considers it worthwhile to ensure his wife and children have a new vehicle that’s safe to drive.
“It’ll be nice maybe a couple leases from now to not have to lease a three-row SUV once the kids move out,” Ament said.
Auto leasing is a hotly debated topic. Consumer Reports has long said buyers are better off paying cash for a new car or taking out a short-term loan.
While leasing offers lower monthly payments and repair costs than buying new or used, Edmunds warns on its website that leasing vehicles is more expensive over the long run than buying a car and keeping it. The research firm also says lease contracts can be hard to understand and include hidden fees, including maintenance and damage charges. Simply exceeding the lease’s mileage limits, typically 12,000 miles per year, can cost a driver thousands of dollars.
Leasing also “puts you on a treadmill to buy a new car over and over every few years with no end in sight,” said Anthony Giorgianni, an associate editor at Consumer Reports. “Leasing is just a bad way to purchase a new car unless you’re a really wealthy individual and you just don’t care about costs. Otherwise, it’s smoke and mirrors.”
Jessica Caswell, communications manager at VSP Vision Care in Sacramento, California, said that when she leased a new Honda Civic she didn’t realize insurers often charge higher premiums and fees for leased vehicles.
“It’s a significant amount of money, and you don’t really know about it when you sign the lease,” Caswell said.
She said she may buy the car once the lease is up.
Kevin Tynan, a Bloomberg Industries auto analyst, calls leases “the new incentive.” The question, he said, is how long can U.S. automakers rely on them to fuel sales.
Tynan said that when millions of previously leased vehicles end up on used car lots at cheap prices, it might make less sense for consumers to buy or lease a new vehicle.
“I think we’re about 36 months out from a period where pre-owned makes more economic sense for the average buyer,” he said. “New vehicle demand could flatten for a period beginning in 2017-18 as we work through all these off-lease autos.”
Long-term loans also could crimp sales because people don’t buy new cars when they are paying off the one they own. To ensure that doesn’t happen, dealers will have to get creative with their come-ons, said Larry Dominique, the president of TrueCar Inc., an online auto-buying service.
“It’s a bit easier with lessees since they tend to be customers who like new cars every couple of years, so you’d hope they’d be back,” he said. “But how can you build loyalty with those who buy their cars so that they’ll come back seven, eight years later? It’s challenging.”
One way to build loyalty is through giveaways and promotions, including free car washes, Dominique said.
“I’ve even gotten an offer to attend a free wine and hors d’oeuvres tasting at a dealership,” he said. “It’s coming up with things like that to engage customers that’s important.”
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