The once-hot car-leasing market hit some bumps last year, but a new incentive program and lower interest rates could fuel a recovery, according to an April 9 story by Andy Vuong in the Denver Post.

Though the forecast for car and truck leasing isn't as strong as in the past, many in the auto industry are optimistic that the market will catch its second wind.

"The leasing market right now is getting larger again," Art Spinella, president of Bandon, Ore.-based CNW Marketing/Research, told the Post. "It went through a period of contraction, but now we're seeing more car companies offering more lease deals in order to keep car sales strong."

Car leasing was popular in the late 1990s as consumers jumped at the chance of driving a luxury car without huge monthly and down payments.

But that changed when reality hit, helped along by the Automotive Lease Guide (ALG), the industry standard for resale values. Automakers and other lenders had overestimated the resale -- or residual -- value of cars and trucks that were leased. So when a car or truck came off lease, lenders couldn't fetch as much for the vehicle as they thought they could when they financed the lease.

As a result, lenders lowered their residuals on new leases, which drove up prices and drove down consumer interest. The leasing market declined last year for the first time in 10 years. And a number of private lenders, such as General Electric Co. and AT&T, exited the market.

In an effort to change the trend, auto manufacturers have raised (subvented) their residual values on certain models so they can again offer attractive lease payments to consumers.

Consumers finance a lease based on the difference between the current price and the residual. They pay the difference over the term of the lease, which is usually about three years.

Though a car may be worth 50 percent of its current value in three years, manufacturers are now giving the car a higher residual, sometimes as much as 70 percent. This practice (known as subvention), in turn, lowers lease payments.

The manufacturers write off their losses now, similar to when they offer sales rebates and other incentives. But the lease incentive is offered only on specific models, usually slow sellers.

Monthly payments for new leases on models with manufacturers' incentives are about $100 less than a year ago and are comparable to several years ago, when the leasing market peaked, according to industry analysts.

Lower interest rates are also bringing down monthly payments on new car leases. A 1 percent drop in rates knocks $6 off monthly payments, said Paul Taylor, chief economist for the National Automobile Dealers Association (NADA). So far this year, rates have dropped 1.5 percent, which means payments on leases signed today are at least $9 less than a year ago, he said.

Leasing surged in 1996, when 25 percent of new cars and trucks nationwide were leased, according to CNW Marketing/Research. That figure was less than 6 percent a decade earlier. The market peaked in 1999, when about a third of all new cars and trucks were leased.

Last year, about 30 percent of new cars and trucks were leased. That number is expected to drop to 28 percent this year and to 24 percent in 2003.

Some analysts partially attribute the drop to lenders increasing credit requirements on leases to help decrease the number of defaults.

Vehicle sales, which include leases, are expected to drop 6 percent to 16.3 million this year, said Taylor of the NADA.

Despite the drop, this year's car and truck sales would be the third-highest ever if estimates are met - behind 17.4 million last year and 16.9 million in 1999.