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The Honolulu Advertiser
Posted on: Thursday, May 4, 2006

Car leases surge, along with interest rates

By Russ Wiles
Arizona Republic

Tom Smith checks out a Jaguar at Centennial Leasing and Sales in Phoenix, with sales consultant Tony Sibley. Smith plans to buy one ve- hicle and lease the other. “In a rising-rate environment,” leasing makes sense, says Greg McBride, senior financial analyst at Bankrate.com.

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Walt Walonoski recently signed a lease for a new Honda Accord, his fourth lease deal in the past eight years.

"My wife and I like to drive different vehicles," the Gilbert, Ariz., resident said about the family's desire to switch models frequently and using leasing to make it happen. "It works for me."

Apparently, Walonoski, director of sales and recruiting for a consulting firm, is in the forefront of a rapidly growing trend. After a four-year slump and as interest rates on car loans rise, leasing is making a comeback.

Just last fall, leases accounted for only 13 percent of new car transactions, reports Edmunds, an auto-research firm. Today, the figure has rebounded to nearly 20 percent.

Meanwhile, the number of sales that dealers finance has stumbled from more than 50 percent of transactions to less than 40 percent, as manufacturers struggle to offer zero-interest and other subsidized deals.

"In a rising-rate environment, leasing gains favor relative to buying," said Greg McBride, senior financial analyst at Bankrate.com, a Florida rate-tracking firm.

Higher used-car prices also have helped. Lease companies can offer lower monthly payments when they expect cars to hold their values longer.

"The better the residual value, the more leasing makes sense," said Mike Hughes, general manager of Centennial Leasing & Sales in Phoenix.

Cash-back incentives have moderated a bit, which tilts the scales in favor of leasing. Edmunds reported an average manufacturer rebate of $2,510 last month, down from $2,556 one year earlier.

"Now, with most vehicles, if you finance for 60 months or lease for 36, the payments are very similar," Hughes said.

In the past, that wasn't always the case. As a rule, leasing is good for people wanting to put relatively little cash down and for car shoppers wanting to make smaller payments.

Leasing appeals to people who want to drive cars that are more pricey than they could afford to buy. Roughly half of all BMWs, Audis and Jaguars are leased.

"It's for people who take for granted they'll always have a car payment," said Jesse Toprak, Edmunds' executive director of industry analysis in Santa Monica, Calif.

Leasing also appeals to people like Walonoski who don't want to deal with resale hassles or maintenance uncertainties.

Most leases run 36 months, which works out well for repairs because automakers typically provide full warranties for at least that long.

Tom Smith, of Scottsdale, Ariz., has always bought cars, but he and his wife are thinking about leasing one of their two vehicles.

"We're real estate agents, so we drive a lot of miles. That's why we've always owned," Smith said. "But we're considering a lease because we could turn the car in every three years and wouldn't have any maintenance."

Ownership appeals to those who hang on to their cars for years and don't mind paying more up front if it means no payments down the road. It can be the smarter move for people who drive a lot. Leases often allow for about 12,000 miles a year, with charges of perhaps 20 cents a mile above that.

Also, leases can be hard to get out of prematurely, so it might make sense to buy if you don't want to be locked in to a time commitment.

Consumer watchdogs advise shoppers to compare leases on the same vehicle from two or three dealers and consider shopping around for financing before heading to the showroom.

And one of the most important decisions is perhaps one of the hardest: deciding what vehicle makes all the shopping and negotiating worthwhile.

"The first step is to determine your needs and wants, narrow your choice of vehicles and draw up a budget," Toprak said. "If you then happen to find a great lease for the vehicle you already want, that's the best scenario."