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SUV Glut, Lower Residuals Will Cost New Lessees

December 15, 2000

Sport utility vehicles (SUVs) have suffered the most from a decline in the residual values of leased vehicles. Now lenders are waiting to see what happens when a redesigned version of the Ford Explorer, the nation's most popular SUV, goes on sale in February, according to a story by Micheline Maynard in the Dec. 15 edition of The New York Times.

Automotive Lease Guide (ALG), which predicts residual values — the projected resale value of leased cars — has already told lenders to expect SUV residuals to be lower than the average for all vehicles in the coming year. As a result, leases are likely to cost more, according to Maynard's story.

ALG expresses residual values as a percentage of a vehicle's total price. This month, it set SUV residuals on three-year leases at an average of 43.75 percent for 2001 — down 6.6 percentage points from a year ago. ALG places lease residuals for all vehicles at 46.6 percent, down nearly four percentage points from the beginning of the year.

Residuals have plunged largely because sport utilities coming off lease have been pouring into used-car lots, according to Raj Sundaram, vice president of A.L.G.

The 6.6 percentage point decline on SUVs translates to a drop in value of $1,300 on a $20,000 lease and $1,950 on a lease for a $30,000 vehicle.

CNW Marketing/Research, the Bandon, Ore. firm which tracks residuals, has told lenders to expect lower residuals on the new Explorer, which has been the subject of many subvented lease deals in recent years.

CNW is cutting residuals by eight percentage points on two-year Explorer leases and by five percentage points on three- and four-year leases.

Both ALG and CNW say the publicity over past Explorers' faulty Firestone tires is not a factor in residuals, according to Maynard's story.

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