A form of automobile financing that virtually disappeared under the global economic collapse is returning to popularity in Canada.
The apparent hibernation of leasing had nothing to do with customer preferences and everything to do with a tight money supply and crumbling residual values of the vehicles.
"As credit conditions have improved in recent years, leasing has started to revive," said Carlos Gomes, senior economist and auto industry specialist at Scotiabank.
"The auto industry loves it because the consumer is back in three to four years. The consumer is happy because of the lower monthly payments than in an outright purchase."
The monthly payment drives the industry, and as leasing disappeared, other alternatives, such as 72-, 84- and even 96-month loans came into the market.
But while such long-term loans drove down payments and helped push cars out the door, they introduced their own problems, said Glen Demetrioff, president of DMT Development Systems Group Inc., which supplies integrated IT solutions to manufacturers and automotive clients in 30 countries.
"For the long-term finance options, there are a lot of dangers to the industry," he said. "You're off warranty, you have a long term and negative equity; all those are very hard for a dealer and a manufacturer to convert to a buyer."
Demetrioff, whose company tracks and forwards consumers' online preferences to automakers, said the return of leasing is customer-driven, a point echoed by Steve Milette, director of sales for Hyundai Auto Canada.
As well, Milette said with leasing options that make sense for both the customer and carmaker, there are benefits that flow both ways, starting with reduced costs for consumers.
"Customer retention is a big part of what gives leasing such appeal for manufacturers, but I think we overlook the certainty it provides," Milette said. "With a finance or cash customer, we don't really know when they will be back in the market. They could keep their cars for seven years or more.
"But with a lease, we know that customer will be back in the market in three or four years. We can plan for that and entice them to stay in the Hyundai family."
The trick is setting residual values carefully; high enough for a low payment, low enough to be close to the vehicle's actual value.