Academic journal article The Journal of Consumer Affairs

Vehicle Acquisitions: Leasing or Financing?

Academic journal article The Journal of Consumer Affairs

Vehicle Acquisitions: Leasing or Financing?

Article excerpt

In this study, we investigate household vehicle leasing versus financing behavior using the Interview Survey Portions of the 2001 Consumer Expenditure Survey. Two research questions are addressed in this study: (1) What are the demographics of those who lease as opposed to those who finance, and (2) What are the major factors affecting a consumer's probability of leasing versus financing when acquiring vehicles? Findings show that among income and demographic characteristics, being older, Caucasian or Hispanic, college educated, living in urban Northeast and Midwest, living in large Metropolitan Statistical Areas (MSAs), not having teenagers in the family, and having a higher income increase a consumer's probability to lease a vehicle. Most of these income and demographic effects either become smaller or disappear after the vehicle characteristics are controlled for. Among vehicle characteristics, being newer, Japanese or European made, luxury brand, with more cylinders, with power brakes, sunroof, and four-wheel drive increase the probability of leasing. Purchasing the vehicle new instead of used, having a lower down payment and monthly payments, and having a smaller number of contracted payments also increase the probability of leasing.

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There are three basic methods that consumers use to acquire a vehicle. Some borrow, some lease, and a small minority pays cash. Although there are a variety of reasons that a consumer would choose one of these methods over the other, there is a paucity of published research that addresses this question. With the exception of two recent studies (Mannering, Winston, and Starkey 2002; Trocchia and Beatty 2003), existing research in this area is most likely proprietary marketing studies performed by the automobile sellers and/or marketing research firms. (1) Such marketing studies are usually either descriptive or, at most, bivariate. On the other hand, the limited number of academic studies on this topic have focused either on proposing methods for consumers to evaluate alternative forms of consumer credit when acquiring vehicles (Nunnally and Plath 1989; Patrick 1984) or have only considered a rather limited set of variables in their multivariate models (Mannering, Winston, and Starkey 2002; Trocchia and Beatty 2003). Our study attempts to fill this gap while providing some empirical basis for consumer education and consumer policy.

BACKGROUND AND LITERATURE REVIEW

Early in the twentieth century, the first automobiles were cash purchases. In the Model-T era, Henry Ford introduced auto financing on a large-scale basis. In the beginning of the second half of this century, commercial leasing was common and more recently, retail leasing. Retail or consumer leasing has really accelerated in the past several years. In 1999, about 32.4% of all retail new automobile acquisitions were leases, which was up from only 18.4% in 1993. Also in 1999, a total of 58.8% of consumers financed their automobile purchases, while only 8.8% paid cash (CNW Marketing Research 2000, Document 227). Only 1.2% of used vehicle acquisitions in 1999 were through leases (CNW Marketing Research 2000, Document 211). Two recent studies investigated consumers' choice of leasing versus financing in a multivariate context (Mannering, Winston, and Starkey 2002; Trocchia and Beatty 2003). Using a random sample of 654 households that acquired 700 new automobiles or light trucks in the 1993, 1994, and 1995 model years from a national household panel survey administered by National Family Opinion, Mannering, Winston, and Starkey (2002) estimated a nested logit model composed of payment method and vehicle type. They found that consumers were more attracted to leasing if they had previously leased a vehicle. In addition, income and education were positively related to a consumer's probability to lease. Mannering, Winston, and Starkey (2002) argued that consumers' growing attraction to leasing arose from their ongoing desire to upgrade their vehicles. …

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