Car Leasing vs. Car Buying

Consumers who prefer to lease vehicles may be in for a shock if their lease expires soon. Significantly higher payments are the norm right now. In fact, $50 is the average increase in monthly payments during the past 12 months.

In fact, depending of the brand and finance company, you may find yourself locked out of the leasing arena completely. Chrysler Financial quit offering leases abruptly last summer. GMAC Financial Services has also cut back, as did Ford Credit, although Ford has stuck with leasing to a greater extent than the other two.

The explanation for all of this is pretty simple. Auto finance companies ran into financial problems in 2008 after demand fell for new cars and trucks. At the same time, used-car values fell, especially for full-size SUVs and pickups.

When cars and trucks come back to the dealership after leases expire, the auto lenders end up selling most of them at wholesale auctions. If the used vehicles are worth a lot less than the company expected, the auto lender and its parent company have to cover the loss. So now, auto lenders are hiking prices on leases in order to cover the potential risk of values falling in the future.

Dealerships report that the news is even worse for large sport utility vehicles. The average U.S. monthly lease payment was $498 in 2009, versus $449 in the first quarter of 2008. During the same period, the average monthly lease payment for large sport utility vehicles went up almost $200 -- to $892.

Meanwhile, leasing accounted for only about 15 percent of the U.S. auto industry sales so far this year, down from 22 percent in the first quarter of 2008 according the J.D. Power, a firm that regularly reports information from dealerships.

All things being equal, it could still be cheaper to lease than to buy. In leasing, the customer only borrows the difference between the upfront cost and the residual value. For a customer who likes having a new vehicle, who doesn't mind having a monthly car payment and who doesn't drive a lot of miles, leasing could still be the way to go. Most luxury brands are still offering leases as a way to make their cars and trucks more affordable.

On the other hand, auto lenders are not putting big discounts behind leases like they were two years ago. Cash rebates and low-interest loans could now make purchasing a better option, especially if you intend to keep your new vehicle for a long time.

So, if you are one of the approximately 1.4 million buyers whose lease will expire in the next year, be prepared to make a tough decision whether or not it is worth it to take on a new lease at a higher cost.

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