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Toyota gambles on future with low lease offers

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Toyota gambles on future with low lease offers

Terms could haunt firm later, analyst says



It's an enticing offer: Lease a well-equipped Toyota Corolla for just $189 a month for three years.

For Toyota, the deal could be a financial disaster. To keep customers coming to its showrooms amid a series of embarrassing recalls, Toyota has been offering some of its best leasing terms in years.

But the generous come-on could "haunt them three years from now," depending on how the market turns, said B. Craig Hutson, an analyst with research firm Gimme Credit.

By offering such low monthly payments, Hutson said, Toyota is essentially betting that the vehicles will have superior resale value when they are returned after their leases end. If their value is less than expected, it could cost the Japanese automaker's finance arm hundreds of millions of dollars.

To make the numbers work, Toyota has been setting a vehicle's so-called residual value at about 60% of its sale price new. That can be up to several thousand dollars higher than the estimates of independent analysts, depending on the model.

Although it's hard to project what the market will look like in three years, current data show that prices for used Toyotas aren't holding up as well as the prices of other makes.

According to auto-pricing data company Edmunds.com, the average transaction price of a used Toyota fell 1% in June to $15,073 compared with an industry average gain of 9%.

Toyota is one of the more aggressive companies in setting residuals for its vehicles, but the strategy was less important in previous years, when leases accounted for only 21% of its new car sales and the brand had strong resale value.

But leases now account for 30% of Toyota's business, the automaker said. The numbers don't include the automaker's Lexus and Scion brands.

And now it's offering leases to customers who are greater credit risks. CNW Research noted in a report that one Toyota program requires a credit score of "only 660 to qualify." That's seen as the dividing line between good and poor credit.

"Toyota was in a corner. They had the recalls, and their inventory was climbing," said Matt Traylen, chief economist for Automotive Lease Group, or ALG, which analyzesresidual and depreciation data.

Traylen gives the automaker credit for using a mix of attractive lease pricing and cut-rate financing rather than cash discounts as incentives.

But he said Toyota's resale price estimates were surprisingly high and that it would have to carefully manage the inventory of cars that will come off lease in 2013.

For example, ALG estimates that a well-equipped 2010 Corolla leased in a typical 36-month deal that allows it to be driven 12,000 miles a year will be worth about 53% of its sale price when its lease term is up. Toyota pegs that at 63%. That amounts to a $1,800 difference in the resale value of the car, which sells new for about $18,000.

Toyota said it is confident it can extract the values it expects for the cars when they are returned.



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