Start with some basics. At least up until today, auto leasing served one or both of two functions:
- To obscure the true cost of the car to the buyer.
- To allow the manufacturer/dealer to capture the resale value.
And so now they are stopping leasing because there isn't enough money in it. Say, wha--? Don't these guys have MBAs? Didn't somebody teach them that anything is a bargain at the right price? So, if they aren't making enough money at the current price, then raise the price, right? Sure, I suppose sales will fall, and they may make less money. But less trumps none. The explanation doesn't wash.
Tedious expansion: Unpacked, I suppose that what they are saying is that the resale price of an SUV is not likely to be as great in the future as it was in the recent passt. Fine, so be it. So if they have to cover the cost of the vehicle, they will need to charge more for the lease term. You gueys want to borrow my calculator?
Here's a numerical example. Dealer has a new Belchfire on offer at $50,000. Pick an interest rate: 5 percent . If the buyer pays the whole price in 36 installments, he is looking at a payment of $1,459 a month.
Compare a "lease." Suppose the dealer chooses to "lease," predicting that the vehicle will be worth $40,000 when he gets it back after three years. This means he has to amortize $10,000 (50-40) of the value over the three year term. At five percent, this implies a monthly lease payment of $300 a month. We can stipulate that $300<$1,459, but after three years, the dealer gets his property back and the lessee is looking for a new set of wheels. But suppose that the resale price falls while the total price remains the same, so the dealer has to amortize, say, $20,000 at the front end. The payment jumps to $599 but otherwise, the same rules apply. BTW, this example assumes that the resale value falls while the new price remains the same. I don't know why we should expect this. Seems to me we would expect the market price for the new vehicle and the resale to fall at pretty much the same rate. Fn.: See expansion in the comment infra.