While most automotive lenders currently look upon leasing with the same fondness as their last prostate exam or a two-week visit from their mother-in-law, a growing segment of lenders and dealers believe leasing deserves renewed attention.
The benefits leasing can bring to retail dealership sales have been eclipsed by the enormous trouble cause by previous residual enhancements and those repercussions.
Oh, the good old days of leasing: Honda Accord $99 a month, Jeep Grand Cherokee $179, Toyota Camry $149, Nissan King Cab $88. In more than a few cases, 24-month residuals exceeded 80%.
But a party like this, be it New Year's Eve or NASDAQ 5000 eventually has to end. The hangover was pretty severe, too.
Several large lenders stopped leasing, and those that stayed in the business slashed their residuals. Customers coming off subvented leases were shocked to see payment quotes jump substantially higher than what they had been paying. The remarketing losses were staggering.
In addition, new liability issues have arisen in New York, Connecticut, and Rhode Island that threaten the ability for lenders to provide leasing in those states.
With a majority of those leases written for short terms (24, 36, and even a few for 12 months), these contracts really served as no more than rentals for most customers with low purchase rates at lease maturity, and were returned to the lessor.
Furthermore, since leasing had grown so substantially, these customers' vehicles have simultaneously been returned within the past few years, creating a glut on the market. If that weren't enough, the current heavy retail subvention has further depressed used vehicle prices, extending the residual losses. However, customers still want low monthly payments. How much down and how much a month is still how most customers ultimately choose their vehicle. No method of finance does that more effectively than leasing.
There were real overlooked benefits from the leasing explosion that continue to affect dealers today. Foremost, the customers that returned those leased vehicles often acquired others from the same dealer.
A large component of the record new-vehicle sales volume that dealers have enjoyed in recent years is due in part to the more than three million annual lease maturities, and the “forced” return of those customers into the marketplace.
These were customers with an immediate need for a new vehicle, paid-up contracts and no negative equity on a trade-in.
It will be interesting to see if the real impact of 0% and extended-term financing are felt three years from now with a large segment of buyers having effectively been removed from the market either by choice or because they are thousands of dollars upside down on their trade-in.
The ability to retain or even create demand among these customers may present a huge challenge to dealers and manufacturers.
The off-lease vehicle flood helped spur the need for certified used-vehicle programs. Auto makers created these to mitigate losses and create demand.
With 1.3 million certified vehicles sold last year, these programs have become a new market segment. They draw buyers who would not have previously considered a used vehicle. They create a stronger service and parts department attachment to the selling dealership, and a brand enhancement for the manufacturer.
Grosses on certified used vehicles track higher than non-certified vehicles. Consumers rate the sales experience higher. Without the steady supply of off-lease maturities, the ability to sustain these programs may prove difficult. The demand for prime certifiable vehicles could create shortages and higher prices at auction or equity at lease turn-back in the near future.
In some dealerships and with some makes, leasing activity has dropped substantially. Previously, with the manufacturer lease advertisements driving the customer into the dealership, it was essential that sales people and managers were fluent in leasing.
However since the advertising, volume and demand has dropped, significant training is most likely required to almost reintroduce dealership personnel to the benefits of leasing and how to present a proper A-B pencil, and how to best use available rebates and incentive money rather than simply the discounted financing.
In addition, independent and captive finance companies may need to retrain their sales staff on how to sell leasing. From a lender perspective, promoting leasing has to be an entirely different sales process than traditional retail installment business. Many sales representatives may feel uncomfortable presenting the product, and instead fall back on the comfortable familiarity of retail loans.
Ford Credit, one of the original and strongest proponent of leasing, is pushing leases again, although this time for longer payment terms. This could succeed, as they have a chance to differentiate themselves and take advantage of the opportunity to grow business by offering the low monthly payments customers want.
If it works, expect other lenders to follow. However perhaps this time lenders will act with some minimal restraint and the lease business can again begin to expand.
Bryan Dorfler is an F&I consultant for dealer groups and automotive lenders. He can be reached at [email protected].