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August 1, 2013

ONLINE ONLY: Auto leases on the rise

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SOUTHFIELD, Mich. —

The industry sales pace for the month keeps the U.S. on track for its best year since 16.1 million vehicles were sold in 2007. It's also further evidence of the disparate paths of the American auto industry and the city of Detroit, which filed the nation's largest municipal bankruptcy in history this month.

The reasons for leasing's strength extend beyond the race for the top-selling U.S. car. Industrywide gains in product quality and strong used-car prices allow automakers to project higher values for their vehicles when leases expire. This trend is combining with record-low interest rates in allowing the companies to offer cheaper monthly payments.

Leasing has historically tended to be more common on high- end models, accounting for roughly half of sales for some. David Welch, a product manager for a technology company in San Jose, Calif., signed a two-year lease on a Mercedes E350 4Matic during the Fourth of July weekend.

"Moving into luxury cars, it made so much more sense to rent them than to buy them," Welch said in a telephone interview. "For two years, I've got a car where I've only got to put gas and insurance into it."

Leasing's expansion into more mainstream segments also can cultivate loyal customers who can move up into higher-priced vehicles for their future purchases, said Kevin Tynan, an auto analyst for Bloomberg Industries in Skillman, N.J.

"It does create move-ups," he said. "Instead of being in a compact car and having to lease, you'll get people up from compact cars into mid-size cars by being aggressive there."

Buyers are showing "growing acceptance" of leasing in more segments, including mid-size cars, said Bill Fay, a Toyota group vice president. The prices paid for Toyota's vehicles at the end of their lease, known as resale or residual values, tend to rank among the highest in the industry.

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