Kathleen Hohner, a Toronto based computer consultant, wanted a Honda Civic DX hatchback, but thought the dealer was asking too much. So she got an Acura Integra instead.

JIM KENZIE November 21 1994


Kathleen Hohner, a Toronto based computer consultant, wanted a Honda Civic DX hatchback, but thought the dealer was asking too much. So she got an Acura Integra instead.

JIM KENZIE November 21 1994


Kathleen Hohner, a Toronto based computer consultant, wanted a Honda Civic DX hatchback, but thought the dealer was asking too much. So she got an Acura Integra instead.

Wait a minute. Don’t Acuras cost more than Hondas ? If a Civic was too expensive, how could she manage an Integra ?

The answer : leasing.

In a nutshell, leasing is the same as buying a car under a time payment plan, except when the “loan period” is over, you give the car back. As a result, you aren’t really borrowing the entire price of the car, just the difference between the price and the so-

called “residual value” -what the car is worth when the lease is up. You can end up with a monthly payment up to one third lower than if you bought the car. Alternatively, you could use the same payment to get yourself “more” car.

Also, you pay the dreaded G.S.T. only on the financed portion of the car, not its entire list price.

Establishing the residual value of a car in advance turns everyone in the leasing game into a fortune teller.

In so called “open end” leases, you, the customer, take the risk of guessing wrong. If the lease has been based on the assumption that the car will be worth $6000 and the market value is only $5000, you’ve got to come up with the difference. Should the car be worth more, you


buy it for six grand and either keep it, or sell it and pocket the cash.

Most leases today are of the “closed end” variety. The residual is established to set the monthly payment; When the lease is up, the car goes back to the dealer and you walk - or lease another car.

In Ms Hohner’s example, a $20,000 Integra, worth maybe $8,000 after three years, required her to finance only about $12,000 rather than $20,000.

But couldn’t she have leased a Civic? A $13,000 Civic could be expected to have a residual of, let’s say, $6,000 after three year’s leaving only $7,000 to finance. How could she save money leasing a more expensive car?

Because in the leasing business, all things are not created equal. Some car companies encourage leases, either by artificially inflating residuals (to lower the monthly payment) , by subsidizing inter-

est rates (since they all have subsidiary finance companies that have more flexibility in setting rates than bank do) or by cutting their profit margins.

Why? John Radford, Vice President, General Marketing for Ford of Canada and

Sharon Nishi, Retail Leasing Manager for General Motors of Canada agree that leasing is a “win-win-win” situation for the customer, manufacturer and dealer.

“We’ve had a lot of success with shortterm leases of 24 months” says Radford. We call it The Plan. The customer has a new car at an attractive monthly rate. It’s never out of warranty. After two years, they come back and get another new car. Our customer satisfaction ratings on two-year leased cars is ex-tremely high.

Nishi adds “The dealer gets to see the customer regularly because lease customers are more likely to bring the car in for service than outright-purchase customers.

“And both dealer and manufacturer benefit because they move two cars in a 48 month period rather than one”.

Both Ford and GM are moving away from 48-month deals and neither offers open-ended leases at all.

“With an open end lease, you can structure a very low monthly payment” Says Radford. “But when the crunch comes and the customer has to ante up a pile of money for a car that’s not worth anywhere near that, he gets very upset. We feel that the short term lease is more customer driven and it keeps them happier. We’re getting about 70 per cent renewal on our two year leases.”

Another approach to leasing is the onetime payment plan. Ford introduced their “Plan Plus” with Lincoln. The customer, who typically has more cash to apply to a car purchase, effectively pays about half the new car cost in one lump sum. After two years, they pay again and get another one. About 40 percent of leased Lincolns go out on a Plus Plan deal.

GM’s similar Smartlease Plus is available on all GM vehicles but is is extremely popular with Cadillac buyers. A recent program in Ontario offered a Cadillac de Ville, listed at $44,958, for a one time lump sum payment of $18,000 for two years. Nishi notes that Cadillac buyers tend to be older with more money to put down. They prefer not monthly payments and driving a brand new Caddie for less than twenty grand.

And since half the loan balance is retired immediately, reduced interest charges can save $3,000 or more on a $45,000 car. Ford has had some Plan Plus action on Escorts. “That’s largely parents getting cars for the kids to go to university” says Radford. “They want them in a new car with a full war-

ranty and to have that cost completely covered.”

Leasing Ford Escorts for University students? And Honda Civics? Isn’t leasing just for luxury cars and traveling sales reps?

Not exclusively, not any more. About 40 percent of Ford’s retail business is now leasing and that includes vehicles like the entry level Aspire, the family oriented Wind-

star mini-van and the full size F-Series pickup. GM is about on third, again spread across the entire product line.

Jaguar has benefited from Ford’s leasing expertise and access to Ford’s internal credit company to raise leasing penetration to a whopping 70 percent. In contrast, Mercedes Benz of Canada is currently doing only about 30 percent of their volume in leasing although that has gone as high as 45 percent when the company has run programs to encourage leasing.

Historically, the Japanese companies haven’t made leasing a big part of their marketing strategy. As long as they could sell everything they could import, they didn’t have to worry. But, as Ms Hohner’s experience with Honda and Acura shows, they are catching up rapidly.

What happens to all those two-year old leased cars when they come back? If the car maker has subsidized the residuals, don’t they end up with a lot of cars which aren’t worth as much as their value on the company books?

Says Radford “Our residuals are getting stronger all the time, especially with newer high-tech products like Ford Contour, Mercury Mystique and Windstar. Besides, dealers can’t get enough clean, low mileage, two year old used cars. We’ve also introduced a leasing plan for used cars called “Program Plus”. We turn these cars to customers who were previously restricted to fouror fiveyear old cars. Now, they have a newer car with a warranty on it at a

very friendly monthly payment”.

Sounds like a financial juggling act but it seems to be working so far.

In the not-so-distant past, you could expect to pay more overall for a leased car than a financed one. That’s because there was the extra profit for the leasing company to take care of plus the fact that interest on the residual was building over the lease period.

Today, thought, with all the subsidizing going on, the total cost of leasing and buying are very close. It’s hard to see how Ms Hohner could have bought the Integra for less than her $235 a month lease, over three years with an $8,000 residual.

Which means if you’re interested in leasing, be prepared to haggle - just like the good old days. After Ms Hohner got her great deal on the Acura, she took a male friend into the same store. Typically, the male sales rep turned to the man and said “Can I help you, Sir?” The friend just pointed to Ms Hohner and said “Talk to her.” The sales rep, who recognized her, said “Geez, I did that a few months ago”. Ms Hohner beat him up again.

She also advised another friend who ended up with a loaded Camry for just over $300 a month, less than the A “cheaper” Nissan Altima that he had considered.

1 ^ This woman is

wasting her time in the computer business.