The lending landscape has changed dramatically during this current credit crisis as the deliberate and dramatic cutback in leasing has consequences beyond the immediate sales environment. But it may open up opportunities for the brave and insightful.
The severe cutback in leasing will result in limiting purchase and finance options for consumers. It also almost guarantees the continued extension of the traditional installment loan terms to beyond six years, making equity positions even harder to achieve and limiting future sales. Every dealer knows the impact that the initial wave of 0% or 72- and 84 month term deals have had on their ability to get people out of their vehicles and their negative equity.
The benefit of the shorter trade cycles that leasing establishes is the actual need to purchase another vehicle at a fixed date. That definitive termination date and subsequent ensured replacement vehicle purchase shopping are lost without a set number of expiring leases.
As smart dealers have long known, when properly worked, lease loyalty programs can generate a regular schedule of customer sales at a predictable date and budget. Removing this may lead to more brand-loyalty erosion.
Consumers will be forced to chase a deal that fits their financial needs as they try to trade in their vehicle three years before their loan matures, rather than sticking with their current leased brand and the easy-to-implement loyalty initiatives.
Additionally, what does it say to a consumer when a manufacturer will not lease one of its own vehicles? If the auto maker has no confidence in the future resale value of its cars, why should the consumers?
From their perspective, this likely will further accelerate the migration to imports with high resale value.
Adding to this is the exodus of independent banks from the leasing business. Unable in this environment to accurately judge the future resale values and with limited confidence in the standard residual-setting sources, many firms view the prudent step is at least temporarily to limit or eliminate their leasing programs.
This forces dealers to rely further upon those captives that are still offering salable programs, further restricting the lease opportunities. Thankfully for these banks, credit unions have not yet been aggressive with leases when compared to traditional loans.
But as the free market has shown us, when everyone moves one way there's usually money to be made by taking a contrary position. When properly managed, leasing is still a more profitable option for a finance company than a traditional loan, with the upfront bank fee and asset depreciation.
And now that there is even less competition, it might be a great time for a bold lender to dive into the market and immediately grab share.
And with the competitive pullback, the competitive environment will be less severe and likely can accept more moderate rates and residuals — allowing the bold to become a market leader.
Whether it is a bank recognizing this market opportunity, a private-equity fund or a venture-capital firm supporting some independent finance provider, the market has shown the natural level of leasing is about 25%.
In August, J.D. Power and Associates reported that only 14.3% of new purchases were leased. Not surprisingly, and not coincidentally it was one of the worst new-vehicle sales run rates in memory.
In essence, leasing isn't dead, but is in hibernation. The demand is there and market efficiency requires that the demand is filled.
Whether it's the captives strengthening in time and recognizing the benefits of leasing for their brand and marketing; or banks that see the potential profitability and lessened competition or a new alternative source that drives the growth; leasing will rebound because it is still good for consumers and manufacturers.
F&I consultant Bryan Dorfler works with dealerships, lenders and aftermarket providers nationwide. He is at [email protected].
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