MONTREAL – Consumers are increasing turning to leasing when acquiring a new car, but the availability of ultra-long loan terms means the days of almost half of drivers travelling the leasing route are gone, according to industry observers.
After slipping to a low of seven per cent in 2009, now about one in five cars in Canada, or 20 per cent, are leased. Still, that is well below the 45 per cent peak in 2005.
“If I had to predict it right now, I could see it creeping up into the mid-20 per cent range – so roughly half of where it was,” says Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc.
Overall, Canadians prefer car ownership with about 13 per cent paying cash and two-thirds obtaining loans, he said.
Whereas U.S. consumers have used leasing mainly to flip their cars every three or four years, more than half of Canadians have traditionally bought out their leases and then switched to loans, he said in an interview.
Banks and car companies responded a few years ago by introducing 84- and 96-month loans.
“It has been very popular in Canada and that has taken a big chunk of the leasing market,” DesRosiers added.
Between two-thirds and three-quarters of loans now exceed 72 months, with seven-year terms the fastest growing option.
Many car manufacturers got out of leasing in 2008 during the global financial crisis when credit markets seized.
“Even now they are cautious to return to the leasing levels that we saw five years ago,” says Chris Travell, vice-president of Maritz Research.
Travell anticipates extremely attractive lease deals will surface as car makers try to lure new car shoppers seeking to get “more car” at an affordable price.
Luxury brands such as Mercedes and BMW are in an “epic, titanic war” to get more buyers into the segment and are using leasing to offer lower payments, added George Iny, president of the consumer group Automobile Protection Association (APA).
Leasing has the advantage of reducing monthly payments because consumers pay mainly for the time they have the car and the kilometres they put on it.
It appeals particularly to wealthier consumers who don’t want to tie up their money in a car and can afford to change their ride every few years.
“It’s partly vanity or prestige,” he said, noting that most consumers “overbuy” and don’t seek a car just to satisfy their needs.
Leasing is attractive because there’s little maintenance while cars are under warranty and no worry about reselling at the end of the lease. That also makes it an alternative for consumers who would prefer a stable monthly payment than worrying about unexpected repairs on older model used vehicles, he said.
But it’s the most expensive way to own a vehicle. Monthly lease payments continue forever, whereas owners eventually see payments end. It’s also a poor choice for high mileage users who face extra costs after surpassing pre-determined limits.
The lowest-cost option, aside from paying cash, is to finance the purchase and run the car into the ground.
“The maintenance cost is almost never going to be more than the loss of value on a new car in the first couple of years,” he said.
The APA fears that ultra-long amortization loans are not healthy for the car industry because some owners will retain balances on their cars, even as they shop for a replacement.
“Right now it’s fuelling the upswing, going forward it may fuel a downswing.”
An alternative to leasing a new vehicle is to take over an existing lease. Companies such as Leasebusters provide a less costly way to break leases than going through a dealer.
“A lot of people have woken up on both sides of the coin to the benefits of a lease transfer,” said Tom Liebman, who runs the Montreal franchise which opened in 2004.
Even after offering a cash incentive, the original lessor can save more than half the cost of breaking a lease, depending on the type and condition of the vehicle, he said.
The service is attractive to those looking for a lower cost, short-term options requiring no downpayment.
“It’s kind of fun,” added the APA’s Iny, who said customers can try a convertible, luxury vehicle or SUV for a few years.