Gas Prices Make Consumers Reconsider SUVs
MICHEL MARTIN, host:
And now, advice on what to say when gas prices are telling you let go of that lease on your SUV. It wasn't too long ago that SUVs were all the rage, and some people like having a new one so often that they choose to lease rather than buy. But now that the price to fill up is so expensive, some SUV lovers would rather switch than fight. But how?
Our regular personal finance adviser, Alvin Hall, is away, so here to talk with us is Warren Brown. He's the Washington Post automotive writer, and he joins us from our New York bureau. Warren, welcome back.
Mr. WARREN BROWN (Automotive Writer, Washington Post): Hey, good to be back. How are you?
MARTIN: I'm good, thank you. First, tell us your thoughts about car leasing. Has this - seems to me, it has been coming increasingly popular over the years. You see them advertised all the time.
Mr. BROWN: Here's the deal. To be perfectly frank, a lot of the people who lease vehicles lease them because they could not afford to buy them. So now you combine, you know, the leasing burden with the rising of fuel prices, and then you have a problem. You can't really afford to lease, and you can't really afford the fuel prices. However, you could wind up making your situation worse financially by dumping the lease without running the numbers.
For instance, what do I mean by that? First of all, you want to make sure that the penalty incurred in dumping the lease is not so great that it really wouldn't make much sense to you financially, you know, to get rid of the SUV, whatever the gas-hog it is you're driving, you know, anyway.
Secondly, presumably you're going to still need personal transportation after you get rid of the leased vehicle. That means that you're looking at probably buying another car, used or new. And so then you have to factor in the finance and insurance cost of that and then try figure out whether or not you come out ahead or whether you're in deeper trouble than you were in the first place.
MARTIN: OK. Let me just unpack some of this that you're talking about. Generally, is it hard to get out of a lease?
Mr. BROWN: No, generally it's not hard to get out of lease because most of the companies are more than happy to charge you with whatever the penalty is for early termination.
MARTIN: But there generally is a penalty for early termination?
Mr. BROWN: There generally is a penalty, yeah, and that's up front in the contract.
MARTIN: What's the range we're talking about here? Is it a percentage of the amount? Is it generally the whole lease cost?
Mr. BROWN: You can wind up paying from a few hundred to several thousand dollars in termination penalties, depending on the wording of the lease and the vehicle leased.
MARTIN: What if you want to buy the car? Is that a way to get out from under it, and then you could sell it?
Mr. BROWN: Let me ask you something. When has rent-to-buy ever been a good idea for the consumer?
MARTIN: I don't know.
Mr. BROWN: Because that is essentially what you would have done. You would have rented to buy, which means you would have lost money twice. You would have lost the money that you spent on the lease, and now, you're going to turn around and try to finance it. And also keep in mind that what you're financing has greatly reduced residual value, which is why companies such us Chrysler and several others are backing away from leases right now because the residual values, particularly on vehicles that get less than 20 miles per gallon, have practically disappeared. And so...
MARTIN: So what you're saying is that the car might be worthless? Well, of course, all cars are going to be less. They all depreciate, but what you're saying is that the value might have shrunk more than you actually anticipated.
Mr. BROWN: Well, not might have. Let's be perfectly frank about this. The value on any vehicle getting less than 20 miles per gallon greatly diminished, greatly diminished, which is why Chrysler Corporation and other companies are getting out of leasing because they are losing their shirts on the residual value.
Looking at General Motors Acceptance Corporation, for example, it's looking at something like 2.45 billion dollars in lease losses because of declined residual value. So those companies are taking the hit. They don't want to do it anymore, and so, as a result, you know, if you lease or buy something that's, you know, low gas mileage right now, you know, you are taking a tremendous hit financially.
MARTIN: I think what I'm hearing you saying is that it's not just that easy. You just - if you're driving around, you know, a Hummer or a Tahoe or something like that, and you're leasing it...
Mr. BROWN: I will consider...
MARTIN: You are not - you're not going to be happy with this conversation.
Mr. BROWN: I tell you what I won't do. I will confess my Josephite and Jesuit background, and I will tell you that sometimes it is better to live with the sin you have committed. If what you did was buy a car, you know, based on greed, you couldn't really afford it, which is why you leased it in the first place, you're going to have to just maybe find another way to live with it by cutting out other expenses in your budget.
Dumping that vehicle without running the numbers and getting into another one could basically compound, you know, your financial situation. So you just might have to suffer the pain, saying mea culpa, mea culpa, mea maxima culpa, you know, swallow the loss and try to work out your financial well-being another way.
Mr. BROWN: Ouch.
MARTIN: So, Warren, finally, what should the consumer learn from all this?
Mr. BROWN: That greed is an ugly thing when it comes back to bite you in the butt.
MARTIN: Oh, dear.
Mr. BROWN: And in the case of, you know, buying more vehicle than you needed or could afford in the first place, are - and particularly like leasing it because you couldn't afford to buy it, OK, now, you get to see, you know, the folly of your ways. So you're not going to get rid of them by making another dumb financial mistake, which is as I have learned personally. So I'm talking to you from experience right here. The only way you're going to get rid of them is suck it up and just go and do the penance.
MARTIN: Tough love from Warren Brown.
Mr. BROWN: That's it, kiddo.
MARTIN: Warren Brown is automotive writer for the Washington Post. He joined us from our New York bureau. Warren, thank you so much.
Mr. BROWN: Good to be here. Take care.