Dealers Losing Money on Leases; But Majority Prefer to Buy

It isn’t a shock that many of America’s car dealerships would rather sell cars than lease them. But the real surprise is that buyers are beginning to agree with them.

“It’s time to let leasing go,” said Jeff Steffes, Sales Manager at Jeffrey KIA in Roseville, Michigan. “Things have changed.”

Things have indeed changed for car dealers who began using leases over 10 years ago as a method to move vehicles off lots more quickly. Today, a weakened economy, sky-high gas prices, and government emission mandates have not only changed manufacturing strategies, but buyer’s attitudes as well.

Almost 65 percent of respondents to a BuyingAdvice.com survey said they see no advantage of leasing a car over buying anymore. Over 70 percent said they believe leasing poses a greater risk than buying.

“After experiencing (two) leased vehicles for six years, I’m ready to purchase a vehicle,” said LaSaunji Colston of Detroit, who is ironically a Fleet Coordinator for one of the world’s major automobile manufacturers. She said lessons learned during leasing have given her, well, a new lease on life as far as better understanding vehicle usage.

“The overall leasing experience was OK,” said Colston. “But the notion of having to be concerned about monetary penalties for extra miles is a concern I’d rather not have.”

All vehicle leases come with annual mileage restrictions. Go over those allotted miles per year and you’ll pay extra for each mile over the limit when you return the vehicle, unless you’d already purchased extra miles in a side contract from the start.

“Mileage scared me witless,” said Jim McFarlin, a past lease customer and Information Officer at Wayne State University.

“You can put 100 miles on a car in one day in Detroit without trying. I requested the maximum amount of miles I could afford and paid extra up front rather than get scorched on the back end.”

Of course, leasing will always have its advantages to some, particularly executives and business owners who recoup a big chunk of the expenses at tax time.

Rex Miller is one of those execs who is a perfect candidate for leasing, but he said he’s never gone that route. “I’d be leasing (today) if they could come up with an equitable formula for mileage,” said Miller, marketing director for a major automotive supplier in Chesterfield Township, Michigan.

“Give me a one-year lease with a 35,000-mile option and I’m there,” he said dryly. Unfortunately for Miller, that type lease will never, ever happen, because car dealers are already losing money on the way leases are structured currently.

At the height of the leasing phenomenon, a lot of people chose to lease SUVs and some wildly popular trucks. Depending on the make and model, SUVs and trucks can easily top $50,000 to buy when fully loaded. So while some of these leases lived out their years, America’s weakening economy and ever rising gas prices have sidelined a lot of shiny utility vehicles, or even worse, put them back on dealership lots when their lease is up.

“What would be ideal for us (dealerships),” said KIA Sales Manager Steffes. “Is for people to buy vehicles when their lease is up. But, what’s happening is they turn the vehicle in and we’re stuck with them because they’re not selling in this economy. The dealerships end up eating the cost of it.”

Steffes said that fact alone is what’s forcing the quiet movement among dealerships nationwide to get away from leasing by offering more creative ways for people to buy. Namely, 6-year loan agreements.

“Out West and down South 72-month purchasing agreements are a popular option being offered to car buyers,” he said.

“Ninety-five percent of the vehicles that we sell are on 72-month contracts. “Everybody wants a car that’s fully loaded with all the bells and whistles, but they only want to pay $250-$275 a month for it,” he said.

“That’s not going to happen. So, we have to be realistic and understand that to meet the customer’s needs we have to be willing to be more creative.” Steffes said.

Another concern that’s unique to Michigan dealerships that’s a cause for worry is that, “An extraordinary amount of people with relatives working at auto plants take advantage of the plans dealerships offer”.

The Plans Steffes is referring to are incentive agreements offered by automakers to employees, friends and relatives to buy or lease vehicles at discounted rates. The Plans caused spikes in auto leases, but has now put a lot of those lease vehicles back on dealership lots.

Steffes says changing times constitute a new way of thinking to get cars moving off lots again … and be sure they don’t come back.

“We’ve got to get back to reality (at the dealerships),” said Steffes. “Back to the reality of how we make buying a car more attractive than leasing.”