Poor Used-Truck Values Drive Chrysler Out of Leasing

Chrysler dropped a bombshell late last week, part of the ongoing fallout from the high price of gas, and the fact that with falling demand, used pickups and SUVs are worth a lot less than they were just a few months ago.

In turn, that means Chrysler takes a beating on trucks that come back at the end of a lease, and are re-sold at auction. Accordingly, its consumer finance company pulled the plug on leasing in an announcement late Friday, July 25, effective Aug. 1.

That means Chrysler's in-house finance company will stop offering leases. As reported here, Ford last week wrote off $2 billion on the value of its lease portfolio, for the same reason. GM is facing a similar set of circumstances, but it hasn't announced its second-quarter earnings yet.

Chrysler dealers are predictably shocked. They're probably mad as hell, too, but the ones who spoke with Automotive News late last week managed to confine themselves to "shocked," including one dealer who said leasing accounts for 70 percent of his business.

In a written statement, Chrysler allowed that "Chrysler's dealers can still pursue lease financing arrangements through other institutions." Those "other institutions" are big banks, which are likely to beat a hasty retreat out of leasing even faster than the car companies, so that's not very helpful advice to the dealers.

Chrysler also suggests that its deals on loans will be just as good as lease deals. That might be true in a limited number of examples, but day in and day out, all other things being equal, the monthly payment on a lease is always going to beat the monthly payment on a loan.

That's because in leasing, the customer only borrows the difference between the upfront cost of the vehicle, minus what it's worth at the end of the lease. To explain the concept, lease companies used to advertise "half a car," because in leasing, you only have to borrow enough money to pay for roughly half of the car's value. A special deal on a loan would have to be awfully special to make up the difference.

The down side to leasing is that you always have a car payment. With a loan, eventually you can pay it all off, and your monthly payment goes to zero. If you keep a car long enough, it's probably a better deal than a lease in the long run, assuming the car holds up.

The upside to leasing nowadays is that at the end of the lease, the car company takes the hit on the depreciation, not the customer. Apparently, Chrysler was feeling too much of that heat, and decided to get out of the kitchen.