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A new lease: increased acceptance of auto leasing gives dealers a welcome boost.

Auto leasing has been booming. That's been the case in most of Indiana for the past few years, according to dealerships around the state and Jim Olsen, executive vice president of the Automobile Dealers' Association of Indiana.

Kiplinger's Personal Finance Magazine reported in May that of 14 million new vehicles bought by consumers this year, 3.5 million are part of a leasing agreement.

And they're not just the pricier foreign cars--American automakers are getting in on the act more than ever before, pushing shorter leases to cushion the effects of productive overcapacity--the situation that arises when they can make more cars than there are people to buy them. Rather than sell more people cars, the goal is getting them to buy cars more often. That's good for manufacturers as well as for dealers.

Tom Webb, chief economist for the National Automobile Dealers Association, notes that manufacturers are subsidizing leases with their rebate programs.

"Some of the money that was going into rebates, per se, has gone to subsidize leases," Webb says. "One way would be when you set the residual values. The other is cost of funds or interest rates. I think most people expect it will continue to grow."

In Indiana, Olsen says, regional economics and consumer preference play a part in buying or leasing; Central and Northern Indiana dealerships get more of the leasing business. Generally, he credits the growth not only to rising car prices in the '80s and the elimination of loan interest as a tax write-off in the 1986 tax code, but also to those specific efforts by automobile manufacturers and their finance companies to make it more attractive.

"With the low interest rates being offered by the automakers' finance subsidiaries, leasing leaves many people in a position to drive a new car every few years," Olsen says. "It doesn't involve a down payment. All they need do is make the monthly payments, which are equal to or lower than those on a loan.

"It's gaining popularity and has been for the past couple of years," Olsen continues. "You can lease a car at a much lower rate than buying one. And, if you're in the market to buy a new car every two or three years, it can save you money. On the other hand, somebody that keeps a car five years or longer will probably be better off buying."

Dennis Reinbold, president of Dreyer & Reinbold BMW-Infiniti in Indianapolis, says his company has been doing leases for about 10 years and each year leases have made up progressively more and more of sales.

For certain models, such as the Infiniti Q45, as many as 98 percent of the dealership's sales are leases. "Across the board, about 60 percent of our sales are leases," Reinbold says. "If we can sell a person two cars in six years as opposed to one in six, obviously we get to see the customer more often and the customer enables us to sell more cars."

Scott Bowman, general manager of Tom Kelley's five dealerships in Fort Wayne, says sales have been up 15 percent in the past year and much of that has to do with better leasing conditions and promotions by manufacturers.

"In our Cadillac agency, we do over 50 percent leasing," Bowman says. "In our Buick agencies, we do about 25 percent leasing. It's all doubled from two years ago. I think the manufacturers are aggressively trying to lease, so they're setting higher-than-bank residuals, plus they're offering lower interest rates, trying to get customers to buy cars more often."

With the Kelley dealerships offering only domestic models--Saturn, GMC, Buick and Cadillac--and Fort Wayne hosting a General Motors assembly plant, domestics own about 80 percent of the city's car-buying market, he says.

Most of his leases are to individual customers instead of businesses, he adds. And they're not just buying the high-end cars, of which 75 percent are sold by lease. Mid-price cars and even trucks are starting to earn their share of leases as well.

For Tony Rakowski, sales manager at Mike Raisor Imports in West Lafayette, it's how expensive cars have gotten since 1985 that has promoted the positive atmosphere for leasing.

"We probably lease 60 percent of our high-line cars, Audis and Mercedes. Because the higher line cars are more expensive, they can write more off if they lease rather than purchase," Rakowski says. "Most people that go for that type of car are professional people, and their tax advisers tell them to lease rather than buy."

And, says Evansville dealer D. Patrick Inc.'s general manager Ray Farabaugh, leasing takes away the risk that you might want to buy a new car and find that the value of your present car has plummeted below what you still owe on it.

Security against such a loss is guaranteed in a closed-end lease where an end-of-lease value, or residual, is predicted by the leasing agent, finance company or bank. Farabaugh says most dealerships do not offer open-ended leases and customers should be wary of someone suggesting one.

He illustrates the value of a closed-end lease with an example of someone who leases a $20,000 car for three years with a residual value set at $10,000.

"Assuming you've met all the requirements of the lease, the mileage and maintenance, and if the person who made that residual decision was wrong and the car is worth only $6,000, the customer hands him the keys and walks away--no liability. If the car is worth more than $10,000, the customer has the right to purchase that vehicle at the lease-end guarantee or walk away."

The benefit for the consumer is there is no risk at all, he says.

"When you purchase, for example, the Audi 5000, where the unintended acceleration problem forced their value in the marketplace to plummet ... the consumer was the victim. At the end of a lease, it wouldn't matter what the car was worth because it wouldn't be the consumer's risk."

Dan Keca, general sales manager of Napleton's River Oaks Cadillac in Hammond, describes leasing as a "win-win-win" situation. The manufacturers move more cars off their production lines, dealers sell more cars on their lots and consumers are kept nice and comfy in the latest model of their favorite car.

He says leasing amounts to about 35 to 40 percent of his business, up from 5 to 10 percent about four years ago.

"I think it was '88-89 that GM came out with Smart Lease," Keca says. "Then it was just another idea to sell a car. Now, it's getting to be the only way."
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Title Annotation:Auto Industry
Author:Mogollan, Carlos David
Publication:Indiana Business Magazine
Date:Nov 1, 1993
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