Now in some parts of America, it's possible to lease a car and buy it (sort of) at the same time. Best of all, dealers and customers both can come out on top.
"It's buying, because you actually get a loan; but sure, it resembles a lease deal a little," says James M. Harris, vice president-development, Empire of America Federal Savings Bank.
"More than a little," asserts Martin J. Koreck, vice president-sales, General Electric Credit Auto Lease Inc. (GECAL). "It's clearly an effort to piggyback" on the "increasing popularity of leasing as a way for dealers to increase volume."
Whether it's more like lease or more like loan, the "buy-back" car deal is the latest offered for dealer use by a growing number of banks bent on grabbing a bigger share of the yearly U.S. car and light-truck financing pie -- worth about $150 billion.
"Autos are the best growth market that money services have," says a Chicago-based bank executive. "Houses are sporadic, farm loans are a disaster. But autos are moving, and the potential there far and away leads everything else."
Financing leased cars "has literally boomed," he adds, from "a small percentage in the early 1970s" to an estimated 25% of all those sold in the U.S. today.
"You can see why the banks are trying to come up with loans that capture some advantages of a standard, or true, lease," says GECAL's Mr. Koreck. "But they can't quite do it."
Buy-back auto loans are offered in New York, Michigan, Florida and Texas by Empire of America's 120 branches. They're also under test at nine branches of Marine Midland Bank, which services around 1,000 car dealers in New York, and being considered by banks in Texas and California, among others.
Each bank's plan mimics a lease in that the car's value is covered only during the loan's term. But the value remaining at loan-end is "guaranteed": The bank will take back cars in good shape at no additional cost to the borrower, or -- again similar to leasing -- the borrower may sell the car himself, pay off the guaranteed amount and pocket any excess.
Under a third option, the borrower may refinance the balance owed "at the then-prevailing interest rate," and keep the auto.
An initial down payment of 10% or more on the total price still must be made, "but payments are lower" than with conventional, full-amount loans, "meaning more expensive cars can be afforded, and owners can deduct loan interest from income taxes -- something you can't do with a lease," says Joseph N. Pastwik, Empire of America senior vice president.
Mr. Pastwik gives this example of "the Ultimate Reduced Borrowing Option," as his bank calls it:
"A buyer takes a new car for $10,724 and pays 10% down, leaving $9,652 to be financed at, for instance, a 13.95 annual percentage rate. The bank after 36 months will be $4,900, provided there's no physical damage and it runs well.
"The customer repays principal and interest on $5,824 -- the difference between the total price and the predetermined value after three years -- but pays only interest on the $4,900 residual value."
Monthly payments, he adds, would be $219.25 against $329.64 under a conventional loan. What's more, average annual loan interest of some $1,100 "is deductible -- a big advantage over a lease."
That's all well and good, "but still not as good, in most cases," as leasing, replies Mr. Koreck of GECAL, which boasts $1.2 billion in lease-and-inventory financing with 8,000 dealers and independent leasing outlets through 500 workers at 70 U.S. sales offices.
Buyers need to "pay down a lot more money to a loan," he says, and "lease payments are always going to be lower."
He explains that lease-financing companies, who in effect buy the cars from dealers then rent them to lessors, are owners of the cars for tax purpsoes. They recover much of their investment through depreciation and investment tax credits.
The savings means that rental rates can be set low -- lower even than monthly payments under the new buy-back loan plans.
Therefore, the lease-like loans "shouldn't threaten" leasing companies, Mr. Koreck avers, especially if they concentrate "on what they should do -- demonstrate to dealers that leasing isn't just an alternative to the loan route, but -- if done right -- makes customers out of many people who otherwise walk out."
Walk-aways, says Mr. Koreck, "represent a cross-section of occupations, incomes and interests -- anyone disillusioned with today's high prices and loan-acquisition costs, and/or who doesn't want to gamble on future trade-in value."
GECAL steadily has built its field force to more than 70 reps who "regularly run programs at dealerships on how to present leasing to those seven to eight of each 10 who enter showrooms because they want a new car, but leave without one."
The thrust, concludes Mr. Koreck, is to make sure dealers understand that leasing "gets customers who can handle monthly payments, but for one reason or another don't want to handle any type of loan."
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