Auto Leasing: Pros and Cons

If you are considering leasing, you need to do your homework. Here is some advice on how to get the best deal.

Aside from having a new car every few years, a major attraction to leasing is that "you get more car for the same monthly payments," says Robert Haber, a New York City art dealer who is leasing his Lexus RX 330 SUV.


These pluses will seem convincing to many new car shoppers, but to lease successfully, you need to understand the transaction. The concept is simple, but the execution is often highly complicated. When you lease, you pay, in effect, for the loss in value of a vehicle for the three or four years you are leasing it, plus interest on that amount.

Dealers will want to talk only about monthly payments, but to lower those payments you need to understand all the moving parts.

How Leases Work
Leasing comes with its own jargon. The most important factor in determining payments is the difference between the starting cost, known as the capitalized cost, and the estimated value at the end of the lease, called residual value. Auto brands that have high resale value, such as Mercedes-Benz, are good candidates for leasing.

Usually the best available lease deal will be the one offered by the manufacturer's captive finance subsidiary (see definition below). They often offer subvented, or manufacturer subsidized, leases, a promotional effort designed to help move certain vehicles. These deals are most common for luxury brands, and typically the residual value will be fixed, as will the interest rate. Thus your only weapon to lower payments is to negotiate down the capitalized cost — just as you would try to lower the purchase price if you were buying the car instead.

Leasing has its pitfalls, as well.

Do’s and Don’ts

Don't sign a lease longer than the warranty on the car. You don't want to be paying for repairs on a car you don't even own. On Ford, General Motors and DaimlerChrysler cars, three-year warranties would call for no longer than three-year leases.

Don't sign a lease with mileage limitations that are unrealistically low for your driving habits. Excess mileage costs at the end of the lease can be very expensive. You will likely save money by negotiating up front for a limit higher than the typical 12,000 miles a year, if you think you will need it.

Do protect yourself against theft or serious collision loss early in the lease. If the vehicle is stolen or totaled, your insurance will pay only the depreciated market value of the car at that time, which may be less than the total you owe on your lease. So-called "gap insurance" will pay you the difference between your insurance settlement and the total amount you still owe on the lease. Most leasing companies offer this coverage, and it is one of the few add-ons that makes sense to accept. Gap insurance as part of the lease usually won't cost you any more than getting it from your insurance agent, and is more convenient.

Do brush up on leasing jargon, so you can be a savvy negotiator.

Leasing Terms to Know

Capitalized Cost: The lease transaction's equivalent of the selling price. Payments are determined largely by the difference between the capitalized cost and the residual value (see below).

Capitalized Cost Reduction: Jargon for down payment in a lease transaction. You can use it as a way to reduce payments if, say, you have the proceeds from selling your old car, or if you are trading in your old car.

Excess Mileage Charge: A penalty for driving more than the mileage allowance in the lease — typically around 12,000 miles a year. To avoid this penalty, make sure your lease has a mileage allowance matching your driving habits.

Captive Finance Companies: These subsidiaries of major auto companies, such as Ford Motor Credit and General Motors Acceptance Corp., make auto loans on the companies' brands. Often they have better rates than those offered by the dealership itself.

Subvented Leases: Subsidized by the manufacturer, these leases are generally designed as promotional efforts to help move vehicles. Often, these can be one of the best deals for the consumer considering leasing as an option.

Residual Value: What the vehicle will be worth at the end of the lease. It may or may not match true estimates of the used car value at that point. When a manufacturer wants to promote leasing of a certain model, it will lower payments by artificially boosting the residual value.

When Does it Make Sense to Lease Instead of Buy?

A choice to lease or buy with a loan is largely one of personal preference and driving habits. If you typically trade for a new car every four years or less, drive less than 12,000 miles a year and keep your vehicle in good condition, you may be a good leasing candidate.

Especially among luxury brands, the best deals are often ones from the company's own finance arm. Because they prefer promotional leases to giving rebates, companies such as BMW, Lexus and Mercedes-Benz often offer leases that have low interest rates, above-market residual values or both. The result is lower monthly payments.
(C)Forbes

Chrysler scraps luxury car plans

Chrysler throws out plans for Imperial luxury sedan touted by actress Longoria as Cerberus Capital readies take-over.

Chrysler Group has scrapped plans for a luxury sedan that would have represented a bigger, heavier and less-fuel-efficient version of its Chrysler 300C, citing high gasoline prices and tougher fuel economy standards.

Chrysler said on Wednesday that it was dropping production plans for the Imperial, a high-riding luxury sedan that prompted comparisons with the Rolls-Royce Phantom.

The decision to scrap the Chrysler Imperial marked the first step in a sweeping review of future rear-wheel drive vehicles as Cerberus Capital Management prepares to take over the loss-making automaker, two people familiar with the process said.

Chrysler had introduced a concept version of the Imperial with a splashy display featuring actress Eva Longoria at the 2006 Detroit auto show, reviving a nameplate that had represented the top of the automaker's line for decades.

The Canadian Auto Workers union had been told that the Imperial was slated to go into production at Chrysler's Brampton, Ontario, plant in 2009 for release in 2010.

Earlier this month, union officials in Canada were briefed on the company's decision to drop the plan, a Chrysler spokesman said.

"It would have been irresponsible for us to move forward with the business plan for the Imperial," Chrysler spokesman Dave Elshoff said.

Cerberus is acquiring 80.1 percent of Chrysler from its German parent DaimlerChrysler AG in a $7.4-billion deal expected to close as soon as this month.

The Imperial would have been built on a rear-wheel-drive platform shared with Daimler's Mercedes. It would also have added a gas-guzzling sedan to Chrysler's line-up at a time when it is looking to respond to consumer demands for improved fuel efficiency and facing tougher U.S. government regulations.

In preparation for taking over Chrysler, Cerberus has begun lobbying against the higher fleet-wide fuel economy standards passed by the U.S. Senate.

Cerberus Chairman John Snow told an audience in Detroit last week that Senate legislation to require new autos to average 35 miles per gallon by 2020 would risk the survival of the U.S. auto industry. Snow also said Cerberus would be reviewing Chrysler's business plans on an ongoing basis.

"There's going to be a continuing exchange of ideas and looking at what can be done better, what can be improved," he said.

As part of that process, development work on future rear-wheel drive sedans for 2010 and beyond is expected to be suspended for several months while the plans are reviewed with Cerberus representatives, including former Chrysler executive Wolfgang Bernhard, two people familiar with the matter said.

"This is exactly what Daimler did when they took over Chrysler, and Cerberus is going to do the same," a person briefed on the Imperial decision said.

Chrysler spokesman Elshoff said he could not comment, but he said the company has committed to improving fuel economy across its line-up.

Erich Merkle, an analyst at IRN Inc., said he expects that Chrysler under Cerberus will opt to retain rear-wheel drive vehicles, a performance-ready configuration shared by the 300C and upcoming Dodge Challenger.

But he said the new Chrysler could press to incorporate technologies such as cylinder deactivation and direct injection to boost fuel economy of future models. "You don't have to kill rear-wheel drive in order to keep fuel efficiency," he said.

Chrysler, which competes with U.S. automakers like General Motors and Ford Motor Company, relies on sales of trucks and SUVs, such as the Dodge Durango SUV and RAM pickup truck, for almost 70 percent of its total sales at a time when U.S. consumers are increasingly demanding lighter and more fuel-efficient vehicles.

Chrysler, which does not expect to return to profitability before 2008, is investing $3 billion in new plants in Wisconsin, Michigan, Indiana and Mexico intended to produce a family of more fuel-efficient V-6 engines and components.
(C)Reuters

Everybody's Business: The Dream That Once Was Detroit

I am an American, and therefore I love cars. I am an American and, in America, you are what you drive, and here are some memories.

This is the only dream I remember from all of high school: Instead of my light blue, miserable 1955 Chevrolet, I had a white 1962 Corvette like the one my pal Calvin Kline (not the designer) had, and Gay Patlen, my high school dream girl, kissed me on the lips (in the dream). You are what you drive. Even in your dreams.

In 1972, my friend Arthur Best and I went from my boring job as a bureaucrat in Washington down to a small town in Virginia. There, for $1,750, I bought a cherry red, customized, startlingly powerful 1962 Corvette. In an instant, catching rubber as I shifted from third to fourth at 100 miles an hour on Route 95, I was Elvis Presley and Juan Manuel Fangio all at once. You are what you drive. I even took out Gay Patlen in that car.

Yesterday, driving from Beverly Hills to Rancho Mirage, Calif., I was trying to merge in heavy traffic on Route 10 and a huge truck was bearing down on me, not letting me in. I hit the boost phase on my Cadillac STS-V and flew onto the road, well ahead of that behemoth. Superman. Rocket man. Blasting off.

A car is what you aspire to, what you dream of, who you want to be. A car is the bigger, better, badder you.

Detroit is bleeding. Tiny profits or huge losses at the Big Three. Immense buyouts and cutbacks affecting employees. Bankruptcies at auto parts makers. Toyota passing General Motors on the superhighway of auto sales. Chrysler being given away — worse than that, Daimler paying to give it away — to a private equity fund. Knowing a bit about how private equity works, I have the horrible feeling that whatever the United Automobile Workers has faced so far, it’s going to become a lot worse when a group of private equity players with no responsibility to public stockholders is sitting across from the union at the negotiating table.

The decline of the auto business at the Big Three is tearing the guts out of the upper Midwest. When the workers are laid off or their pay is cut, their doctors suffer, and their retailers and their pharmacists and everyone else.

Why is it happening? The answer that everyone gives is excessive wages and health and retirement benefits. But is that all of it? American auto workers make barely more than their counterparts in Japan and less than those in Germany. Yes, there are “legacy costs” of retirement pay and health care for workers in Detroit. Other countries’ workers have pensions, too, although those pensions are more highly socialized than in the United States. But the cost of labor in a car or truck is barely more than a tenth of the price of an average vehicle, according to research done by my alter ego and genius finance-whiz, Phil DeMuth. (The average labor costs of a car or truck are slightly above $2,000, and an average car or truck costs about $24,000. These are rough numbers. If you add in the labor on the parts that go into the car, the number is higher, but it is higher abroad as well.)

THE legacy costs may mean a slight premium in the price of a Detroit-made car as compared with a Japanese or German car. But think about it: when was the last time you heard a buyer of a new car say that she bought her last car because it was 5 percent cheaper than another model she was considering?

I am sure some economists say that somewhere, but what I hear is that buyers choose a car because it looks better or handles better or seems to be better made or — in the case of us insecure men — goes faster. Fit and finish. Reputation for being well-made. Quality of the “feel” when you’re behind the wheel. Sexy good looks. That’s how cars are sold.

And this is where American cars used to rule the world. The Cars of the Fabulous ’50s (there is a book with that name; look at it and be amazed at what Detroit used to make) and the early 1960s were gorgeous, powerful, lush. You had the feeling you were a commodore of the proudest highway fleet in history. Buicks, Pontiacs, Dodges, Oldsmobiles, Chevys, Fords, Mercurys, Lincolns and, above all, Caddys, all looked and felt great. You didn’t need a Mercedes. The American product, Detroit iron, was the stuff of which dreams were made.

“Ye shall be as gods.” That’s what Detroit told us. “Ye shall be as gods.” And Detroit was Parnassus.

Then it all fell apart. Starting in the late 1960s (except for the Corvette, always the design leader in North America), American cars became shapeless blobs. When the cool sport utility vehicles and pickups and the late-’90s Caddys came along — reversing a bad spell for the Cadillac nameplate — there was a slight uptick. But even now, look at the style, feel the feel of the Nissan Altima or the Toyota Camry (often designed and made in America) compared with most of the Big Three’s offerings, and the comparison is pathetic.

(I vividly recall that when I bought a 1997 Cadillac STS, I noticed that the chrome line along the side was uneven. The salesman said blithely, “Detroit isn’t that good on fit and finish.”)

In other words, the problem is not the U.A.W. The problem is not so much legacy costs. The problem is that management stopped making cars that Americans wanted to buy and drive. The Japanese and German models, even if made in Kentucky, just look, drive and feel better, offer more of a thrill and are more reliable than what Ford and G.M. and Chrysler generally turn out. But look what happens when Detroit offers a model that consumers want, like the Chrysler 300C or the wholly redesigned Cadillac STS-V. The dealers can barely keep them in stock. They blow out the dealers’ doors.

How can Detroit revive? Find the people who make the Corvette. Find the people who created the 300C and the Cadillac Escalade and have them design new cars. Hire the quality-control people from Toyota and Nissan and have them supervise the plants around Detroit, just the way the Japanese hired W. Edwards Deming to teach them American quality control after World War II.

It’s not the workers’ fault, even though they will be blamed for it because they are the punching bag at this point. It’s management’s fault. Time to put the bean counters out to pasture and to install people who will design and make cars that dreams are made of. It’s not too late. If Cadillac can do it, everyone can do it. Yes, Detroit, some of us still have faith in you.
By BEN STEIN

Chrysler Sale: What it Means to Consumers

The big news today is the official announcement that DaimlerChrysler will sell the Chrysler Group to private equity firm Cerberus Capital Management for $7.4 billion before the end of the year. This is the first time a private equity firm has bought an automaker and employee concerns naturally stem from the slash-and-burn tactics often employed by such firms.

Cerberus already owns a majority stake in General Motor’s financial company GMAC — for which it coincidentally also paid $7.4 billion last year — and the most logical step of the Chrysler purchase would be to merge Chrysler Financial and GMAC to help reduce costs. For car owners, that could mean a change to the logo on their statements, but unless Cerberus decides to sell one of the three Chrysler Group brands — Chrysler, Dodge or Jeep — there shouldn’t be a significant change for consumers, at least right away.

However, the speculation is that the private equity firm’s penchant for cost-cutting will affect the dealer network of all three Chrysler brands, and it may well mean that the firm will seek concessions from its unions.

We wonder how future vehicle development will progress, since so many recent Chrysler products were partly developed in conjunction with Daimler’s Mercedes-Benz.

Cerberus — named after the mythological three-headed hound of Hades — employs former Vice President Dan Quayle, and its chairman is John Snow, a former U.S. Treasury Secretary under George W. Bush. Snow said that the company wants to make Chrysler a success. “Together I think we will take Chrysler to the next stage of its path to profitability and growth and restore it to the first ranks of the U.S. and the global auto industry."

How Chrysler achieves that success remains the big question.
(C)Cars.com

Detroit's darkest hour

The collapse of pickup truck sales undermines the industry's chances of survival, says Fortune's Alex Taylor.

NEW YORK (Fortune) -- You don't see any on the streets of Manhattan, but almost everywhere else, the homely pickup truck is America's common carrier. GM, Ford and Chrysler sell more pickups than do they anything else, more than two million a year in good times. In addition to high volume, pickups also produce high profits because they are relatively isolated from foreign competition.

So the sales data reported May 1 that pickup trucks have hit the skids is seriously bad news - much worse even than you might think. Without these reliable profit generators, the business model for domestic auto producers in North American doesn't work. Passenger cars, under ferocious foreign assault, are a breakeven proposition at best and sales of formerly lucrative SUVs are falling faster than Spider-Man without his web.

For General Motors (Fortune 500), which raced to launch the redesigned Chevy Silverado and GMC Sierra ahead of schedule last year, the drop is a cruel blow to its plans to turn around North American operations - and may force it to scale back its assumptions about the business going forward. Despite incentives of up to $2,000 per unit, Silverado sales fell 7.2 percent in April.

Ford (Fortune 500) is fighting to protect the F-series with a new advertising campaign touting its durability in crash tests. But the collapse in the showroom digs an even deeper hole for the automaker. F-series sales are down 13.7 percent so far in 2007. At up-for-sale Chrysler, meanwhile, Dodge Ram sales are holding steady but only thanks to incentives that climb as high as $5,000 per vehicle.

There's no mystery about the slump in pickups. Many are used commercially and the collapse of new construction has decimated the market. Trucks are the favored vehicles of everyone on the job site - contractors, carpenters, plumbers and electricians - and a lot of them are out of work. Furthermore, $3-a-gallon gasoline has taken the steam out of personal use of trucks. It's getting expensive to hop into a V-8-powered crew-cab four-by-four for a trip to Starbucks. Finally, foreign competitors in the form of the Nissan Titan and Toyota Tundra are starting to win comparison tests in car magazines and making inroads in the showroom.

The collapse of pickup truck sales puts GM's seemingly quixotic bid to buy Chrysler in a new light. What at first glance appeared to be a reckless grab for more market share is now seen as a mostly defensive move. GM wants to buy Chrysler to take some of its capacity out of the market and improve GM's chances of survival in North America.

Under one possible scenario, GM would have emptied Chrysler's corporate headquarters in Auburn Hills, laying off thousands of white-collar workers, and shuttered most of its engine and assembly plants. It would have kept the Jeep brand, the minivans and Dodge Truck. By wiping out Dodge's and Chrysler's passenger car lines, GM could have put some nine points of car market share up for grabs at a time when it is struggling to hang on to its 20 percent slice.

From Daimler's point of view, GM would have been attractive buyer because it could sweep many of Chrysler's UAW workers under its union contract, which contains givebacks on health care unavailable to Chrysler's deep-pocketed corporate parent. But GM wasn't willing to pay much for the privilege for taking Chrysler off Daimler's hands. GM offered under ten percent of its stock - worth less than $1.8 billion at today's prices - in exchange for Daimler's willingness to foot the annual bill of $800 million to $900 million for retiree health care costs.

All this is a long way removed from business as usual in the auto industry and reflects some unusually creative thinking. It also ratchets up the pressure on both the auto companies and the United Workers to arrive at a new contract in September that is palatable to both sides.
Regrettably, the prospect of cooler heads prevailing seemed far-distant last week. A stalemate at GM's Lordstown plant over union jurisdiction of janitorial and shipping dock jobs caused GM to halt plans for a new small car to be built at the plant.

The company and the union seemed to be back playing their old game of chicken. Unfortunately, when neither side blinks, they both lose.

By Alex Taylor III, Fortune senior editor

Leader emerges in Chrysler bidding

DETROIT (AP) - Canadian auto parts supplier Magna International Inc. (TSX:MG'Z) (NYSE:MGA) (TSX:MG'B) (TSX:MG'A) has emerged as the front-runner in the bidding to grab a significant stake in the Chrysler Group (NYSE:DCX) , according to several industry analysts.

'We now believe there is increased likelihood that MGA could take a direct minority ownership stake in Chrysler,' KeyBanc Capital Markets analyst Brett Hoselton wrote Friday in a note to investors.

Magna also appears to be the favorite of Chrysler's powerful unions, which control just less than half the votes on parent company DaimlerChrysler AG's supervisory board. In Germany, a supervisory board is the U.S. equivalent of a board of directors and would be key in approving any deal to split up the company, keep it whole, or spin off parts.

Aurora, Ontario-based Magna has openly acknowledged its interest in Chrysler, and its chairman, Frank Stronach, wants a bigger role in the global automotive business.

Magna already assembles cars for DaimlerChrysler in Austria through its Magna Steyr subsidiary. Reports indicate Magna was in talks with the Onex Corp. (TSX:OCX) conglomerate about teaming in a bid for Chrysler.

'They've been the suitor du jour for the last couple of weeks now,' said George Magliano, an auto analyst at consulting company Global Insight.

Hoselton said in his note that the United Auto Workers union has approached Magna with a framework for a concession package that would move the deal along.

Officials with the UAW, Magna and DaimlerChrysler would not comment on the reports. But Buzz Hargrove, president of the Canadian Auto Workers union, which represents about 11,000 Chrysler workers, said he knows that the UAW has not offered any concessions.

'That's absolutely not true,' he said.

UAW President Ron Gettelfinger has said he prefers to keep Chrysler with Daimler, and he has strongly opposed any sale to private equity firms, which he said would sell off Chrysler in pieces and cost union members their jobs.

Hargrove has said he would prefer Magna to the private equity firms that have studied Chrysler's finances.

'We'd prefer someone in the industry that has a record of job creation and building, and Magna's the only name mentioned so far that has that kind of record,' he said.

General Motors Corp. (NYSE:BGM) (NYSE:RGM) (NYSE:GXM) (NYSE:GPM) (NYSE:GMW) (NYSE:GMS) (NYSE:GBM) (NYSE:GM) , which also is interested in Chrysler, would have to cut jobs as well because of duplication, Hargrove said.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, said he would not be surprised if the union approached Magna with concessions.

'The UAW is scared to death of private equity,' he said. 'The reason is obvious. Private equity does pretty rough-and-tough things. They run their businesses for financial purposes and not necessarily for the benevolence of the labor force.'
Chrysler lost $1.5 billion in 2006 and is undergoing a recovery plan that will cut 13,000 jobs in Canada and the United States.

DaimlerChrysler announced in February all options for Chrysler are on the table, including a sale.

Among the companies reportedly interested in Chrysler are private equity firms Cerberus Capital Management LLC and a consortium of investors led by Blackstone Group. Neither has confirmed its interest. Billionaire investor Kirk Kerkorian, who tried to take control of Chrysler in the 1990s, also has said he would make a bid.

Magna has more than 82,000 employees in 22 countries around the globe, according to its Web site.

AP Business Writer Matt Moore in Frankfurt, Germany, contributed to this report.
Copyright 2007 Associated Press.