Chrysler plans to drop leasing business
DETROIT (AP) -- Chrysler LLC said Friday its financial arm will get out of the auto leasing business by the end of the month because economic conditions have made leasing more expensive than buying, for both consumers and the company.
The move comes as Chrysler Financial is in the process of renewing a $30 billion credit line with banks amid a startling drop in values for leased trucks and sport utility vehicles that are coming back to automakers as leases end.
Chrysler Vice Chairman and President Jim Press said the company wants to allocate limited resources to retail incentives and financing, which make up 80% of the market, instead of leasing, which constitutes 20% of the U.S. market.
Because banks lend money based on risk, and the risk of leases sold as securities has increased, interest rates to borrow money for leases are higher than those for retail sales, said Tom Gilman, executive vice chairman of Chrysler Financial.
"They basically premium price for the risk, and the cost of that borrowing has increased dramatically," he said.
Press said the dramatic drop in truck and SUV values at the end of their leases also played a role in the company's decision.
"We really reached a point today in this environment where the advantages of leasing, the economic advantages of leasing, have really disappeared," Press said Friday afternoon in a conference call with reporters and industry analysts.
"When you have a certain amount of capital available, you're got to use it in a way that's smart and best for the customers and the company," he said.
Press said dealers will still be able to offer leases through independent sources, but not Chrysler Financial.
New retail incentives
Chrysler said it will sweeten incentives on the retail side to make up for any lost lease business. The company on Friday announced that it will expand zero-percent financing for 72 months on vehicles ranging from Ram pickup trucks to the Jeep Grand Cherokee and Commander and other SUVs. The offers will run through the end of the month.
The company also plans to enhance its incentives during the next 60 days in an effort to capture more of the retail market, Press said.
Steven Landry, executive vice president of North American sales, said the new incentives will in many cases reduce monthly payments so they are close to or the same as lease payments.
"They really look for the monthly payment when they go to the dealership," he said.
Chrysler's announcement comes a day after Ford Motor Co.'s (F, Fortune 500) credit arm took a $2.1 billion charge because of the drop in the residual value of leased vehicles - mainly trucks and SUVs.
Press said Chrysler would have to take a similar writedown, but "it hasn't been a major problem for us at this point in time."
Chrysler, which is 80.1%-owned by Cerberus Capital Management LP, is a private company and, unlike Ford, does not have to report such losses publicly.
Press also said Chrysler's gasoline subsidy incentive, which keeps the price for customers at $2.99 per gallon for three years, will end this month. The deal is based on 12,000 miles of driving per year and the vehicle's government fuel-economy rating.
AP source: Chrysler Financial to get out of leasing business - Jul. 25, 2008
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