WSJ Report Says Chrysler Financial Will Stop Offering Leases
By Chris Haak
According to a report in the online edition of today’s Wall Street Journal, Chrysler LLC has started telling its dealers that they will no longer offer auto leases through its Chrysler Financial subsidiary. The move comes as domestic automakers are seeing increasing losses as a result of lease write-downs, on top of the current credit crunch which makes credit less accessible and more expensive for companies that have a less-than-rosy outlook. You know, companies like Chrysler.
Companies generally incur large lease write-downs when the residual values projected for leased vehicles at the time of the lease origination are higher than the actual value of the vehicles –or the new projection of the vehicles’ values based on current market trends. Amidst Ford’s results released yesterday was a $2.1 billion charge against Ford Motor Credit Company attributed to its operating lease portfolio, so it’s not just Chrysler that is having this problem.
So, why are the resale values so out of alignment with the projected lease residuals? Two reasons, but they’re both intimately related. First, the collapse in consumer interest in large, fuel-thirsty vehicles such as full-size pickups and SUVs resulted in there being far more supply of these vehicles than demand for them. Simple economics moves their prices downward. Second, in response to reduced demand for these same vehicles, the manufacturers slap huge rebates and discounts on them, which serves to further lower the values of the used models currently out there.
I personally ran into this issue several years ago when a Saturn that my wife was leasing approached the end of its lease. It was a 2001 L200 five-speed manual, 65,000 miles, and had been in two accidents. The car was properly repaired both times, but the accidents didn’t help the car’s value, nor did the clutch pedal. GMAC wanted over $8,000 for us to keep this three-year old car, when it was worth less than $4,000 at wholesale. We turned it in and bought basically the same car from a used car lot, two years newer, with just 15,000 miles and an automatic transmission, for roughly what GMAC wanted for us to keep the old one. When GMAC “disposed” of the 2001 Saturn at auction, it likely suffered a loss of about $4,000 – on that single transaction.
The other credit-related issue that Chrysler is undergoing right now is that Chrysler Financial is in the midst of its annual credit facility agreement with several (somewhere around 20) banks. The company is looking for about $30 billion in credit, but it’s having a tough time finding any takers at attractive rates. If it can’t get good rates, they will still find the credit, but borrowing costs will be higher, which will either force the company to pay larger subsidies on discounted interest rates, or pass those higher rates onto consumers, thus crimping sales further.
While the lack of lease availability will likely cause some harm, leases usually aren’t the greatest deals on cars with rapid depreciation, which unfortunately describes the makeup of most of Chrysler’s lineup today. A bigger concern would be the difficulty in finding low-interest loans to help dealers close sales of the company’s products until the newer, more fuel-efficient vehicles such as the rebadged Nissan Versa/Tiida arrive in coming years.
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