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Signs of Recovery: The Car Leasing Market Is Making a Comeback

It's an eternal quandary, but one that's been easy to answer in recent years. Buy or else, because credit conditions after the financial crisis really discourage leasing. That's changing, as leasing is now at its highest levels since 2005. This is great news for certain types of consumers, but even better news for car dealers.

Your typical car lease customer likes new cars and likes them every few years. Sometimes he or she is rolling in a company ride, and when business is good, companies can afford to hire more of the kind of people who will need a car. Like salespeople. But car dealers also like leasing, because they can get the car back after a year or two, gussying it up, and sell it as "certified preowned," which is just the gold standard of used.

Credit for all
What constricted the leasing market when the recession began to take hold was the reluctance of lenders to provide terms to anyone but the most creditworthy borrowers. This flew in the face of the whole leasing concept, which took off when automakers and dealers discovered that people would gladly lease far more car than they could otherwise afford.

You can see how even the combination of a hefty up-front payment and a steep monthly payment on a German luxury sedan, spread out over two years, wouldn't come close to the vehicle's purchase price. This enabled people who weren't technically wealthy to drive rich-people rides. It also enabled the auto industry to extract quite a bit of value from a depreciating asset. Many consumers think that a certified pre-owned vehicle, with its mileage restricted by leasing, is just as good as a new car.

Choice, choices, choices
The informed consumer buys a moderately used car in good working order and then drives it until the wheels fall off, at which point he or she donates it to a charity or sells it to a teenager. Car dealers hate these people, but they also know that not everyone is going to be interested in buying a brand new car. They might come to dealership to look at new cars, however -- and the dealer then wants to have some options. He also wants to be able to get rid of old inventory, by whatever means necessary. Being able to provide lease financing is thus critical.

Automakers, through their lending arms, are better able to do that now. It's a hopeful sign that the overall credit markets are approving. Which doesn't mean that everyone suddenly has an 800 FICO score. Rather, it means that leases can now be written again for those customers whose credit is less than perfect. The level of risk this imposed a few years back was unacceptable. But now lenders are more comfortable assuming that these people will be able to make their payments.

A hunger for used cars
As the U.S. auto market recovers, people who have been holding off on buying a car, of any sort (new or used), are coming off the sidelines. Coupled with the low levels of production over the past few years, this has elevated used car values. The Detroit News sums it up:

The trend reflects improving economic conditions, with credit markets loosening and banks lending more freely at historically low interest rates. At the same time, used car values are strong, giving lenders confidence there will be a sound return at resale.
I think this all represents a kind of natural recession exhaustion. The pendulum swung so far to the side of lending no money and building no cars that consumers and the auto industry overcompensated. Leasing is the perfect way for the market to readjust -- and for truly significant amounts of lending to resume, creating the more dynamic credit situation we need for a robust bounce back from the Great Recession.

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Photo: Wikimedia Commons