Bargains Won't Go Away

"We expect the leasing rate to move up with interest rates," said Paul Taylor of NADA. "It's going to be steady growth for at least three years."

In 1998, leased cars made up 36% of the new car market. Last, it had fallen to 19% but is projected to rise to 21% this year.

Leasing typically allows consumers to keep their monthly payments low on a car that they might find difficult to afford. And, they know they can't be upsidedown as with a purchase, at the end of the two- or three-year lease period when they can simply turn in the car back to the dealer.

For the dealer, a lease counts as a sale. However, when leasing first became popular, leasing companies grossly miscalculated how much consumers should pay for the lease and the value of the residuals, or how much the cars would be worth at the end of the leases.

In their efforts to entice consumers into leasing, automakers charged too little for what was essentially the rental of their vehicles. So when consumers returned them, they rarely wanted to buy the auto because the residual value had been priced too high. Dealers were stuck with large quantities of high-quality used cars, and used-car buyers had a bonanza.

Schnorbus said he was recently in a dealership that was promoting leases to customers. Consumers are better off if they can afford to buy a car, he said. "It's still a gimmick they can use to help the customer get a lower payment. You never build up any equity."

He expects that finance companies will manipulate the residual values and adjust the term of the leases until they hit on monthly loan payments that are desirable to consumers. "You still have to convince the customer that he or she is getting a bargain," he said. "They can fiddle with that residual value. Then that's tomorrow's problem."