Automotive Leasing Rises Along with Interest Rates

Leasing is bounding back as an attractive substitute for last year's employee-pricing sales boom — and is expected to continue on an upswing into the 2007-model year. That's good news for dealership finance and insurance offices, bookers of those deals.

Leasing penetration in early 2006, when interest rates kept mounting, reached its highest rate since 2002, accounting for nearly 25% of overall retail new-vehicle transactions, according to the Power Information Network.

Chief brands benefiting from the lease upturn have been luxury lines such as Audi, BMW, Jaguar, Lexus, Mercedes and Saab. Leasing rates for these brands have ranged from 50% to 70% all year. Saab's rate has been in the 70% range all year, says spokesman Jan-Willem Vester.

Dealers say this trend is giving F&I product sales a major lift.

“The more our revenues and profits come from luxury-brand sales, the higher is our opportunity to sell extended-service contracts, gap insurance and maintenance programs at the upmarket stores,” says Asbury Automotive president and CEO Ken Gilman.

Leasing growth is a business booster for captive finance companies, which act as lessors for their parent automakers, says David McKay, Power network's senor account director for auto finance and insurance.

Higher interest rates, he says, make new-vehicle financing costlier. “Lower payments available on leased vehicles free up consumer cash that can be transferred to F&I products and services at the point of sale,” he says.

In the first quarter of 2006, Power network reports, leases accounted for 46% of total luxury new-vehicle transactions, compared with 20% for non-luxury brand.

The spike in leasing is having other effects in the aftermarketing of vehicles, says Tom Kontos, vice-president of industry relations and analytical services for ADESA.

Kontos forecasts an end to the negative growth rate in off-lease vehicle volume and a “positive” reaction in 2007.

“As wholesale used-vehicle prices have firmed,” says Kontos, “we estimate that a smaller percentage of off-lease units are returning to the lessors, and more off-lease units will be bought by lessees and originating dealers.”

ADESA estimates consumer leases will rise to 3.40 million from 3.36 million last year, while off-lease units returning to lessors for wholesale remarketing will decline from 1.26 million to 1.19 million.

In leasing more vehicles and then reclaiming more at lease expirations, dealers can strengthen sales channels into certified pre-owned and subprime markets, say aftermarket experts, at a time when the Big Three's new-car sales are under pressure and their market shares are declining.

Leasing consultant Randall McCathren says the growing consumer interest in subcompact economy vehicles is not a deterrent for leasing, but rather “a way to make small cars more affordable to payment shoppers.”

He expects the lease rate to advance three to five percentage points in the next two to three years, with new small vehicles enjoying increased demand from lessees.

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