If there’s one component of finance that’s gotten hammered hard in the past year, it’s leasing. Like lenders, lessors have tightened underwriting across the board. What makes things more difficult is the fact that so many lessors have curtailed their businesses or exited the market altogether. In a nutshell: Fewer providers are offering leases, and of those that remain, qualification standards are tough.
Technically, it would seem that leasing would be a popular option these days, with car buyers seeking the lowest possible monthly payments. But because lessors have reined in residual value estimates, monthly payments are not that much cheaper than loan payments. Put simply: Leasing has lost its edge.
In its heyday, leasing commanded about a third of the financing market. These days, I wouldn’t be surprised if the ratio were closer to 10%.
Will leasing ever rebound? Sure, when the memory of residual value losses fades. For now, though, with financiers scrambling to survive the current new-vehicle-sales nosedive, leasing will remain elusive.
Right, Valerie. The ability to afford leases — i.e., the attractiveness of lease payments — is significantly diminished these days from what it was a few years ago. And with a lot of lenders cracking down on 72- and 84-month loans, the days of abnormally low monthly payments on new vehicles are a thing of the past. Any thoughts on how long it might be before leasing recovers?
Leasing should be only for the cream of the customers. Buy here- lease here-pay here is an oxymoron. Those customers do not belong in a lease unless the dealer simply wants to gouge the customer as much as possible and then the dealer should install the GPS and ignitiion demobilizer because they are going to need them.
To the degree that losses are occuring (other than residual value changes caused by exogenous forces such as the price of gas) it usually reflects poor underwriting and that is what most of those lessors did to get sales.
Leases should be as stringent a credit criteria as any collateralized products.
Unfortunately, Americans are having to face the new reality that many no longer qualify for “their dreams”. They will have to settle for basic transportation needs until they can “afford” that “dream”. “Afford” does not mean 60, 72, or 84 month financing.
Marcie,
When I get home I’ll send over some info re: Lease Here Pay Here. Some big advantages are that when the title is in the name of the lessor, it is easier to make a repossession in many states. In addition, sales/use tax is on the payment. With BHPH, the sales/use tax paid up front is forfeit when a vehicle is repossessed, which is a third of the time in BHPH. Instead of a down payment, a security deposit is posted, which adds flexibility to the deal and an extra incentive to complete the contract for the lessee.
Randall McAthren is the expert on this. The whole concept trumps BHPH in my view.
Regarding conventional leasing, I certainly agree with Valerie. Rene, Valerie and the other folks at RVI have their finger on the pulse of leasing as much as anyone.
With the government getting involved in so many aspects of the domestic auto business its no wonder there haven’t been any programs designed to lessen payment and reduce term. As long as resale values (residuals) stabilize, and rebates and incentives are part of the selling equation, subsidized short term leases make sense to shorten the trading cycle and reduce monthly payment. After all, a rebate is a know quantity and comes off the OEM’s books immediately. The residual subsidy is somewhat of an unknown and is realized at end of term, deferring the cost to lease termination and providing an actual figure for projected residual and realized residual. This gives a balance sheet a boost short term. It also gives brand managers an incentive to put a new subsidized lease program on the books when an old one is terminating, to offset residual losses with new lease “profits.”
The driving force is the fact that capital reduction/rebate/lease incentive/trade equity on a short term lease has a dramatic impact on monthly payment, about $50./mo per thousand on a 24 month lease. A $1000. on a 72 month contract lowers monthly payment less than $20. And short term leases mean more potential volume and better control of the buyer’s next purchase/lease.
LHPH is an intriguing concept but presently makes up only a small fraction of the leasing business. To address Marcie’s original post, the future of leasing is really about closed-end consumer leasing and it should be bright!
Everyone believes that today’s lower residuals are such a negative. ALG and RVI have pulled way back and the typical reaction is that a consumer will never go for a lease when the payments are not artificially low. That is far from the case – IF the dealer knows how to sell a lease properly. And that’s a very big “if” because not many do.
When residuals are high, a blind dog can sell a lease. But this short-term gain has proven to be a loser for everyone at lease end. Lenders lose at termination, dealers lose a now distrusting customer and the customer looks at his next car’s higher lease payment and eschews the lease for a 72 or 84 month retail payment.
Where is the logic in that? And why is it that consumer leasing companies like D&M Leasing in DFW are still leasing 500+ cars per month?
The few leasing lenders that remain would be well served to re-educate their dealers on how a more realistic residual is GREAT for the consumer. Those that are not in the game today have a perfect opportunity to get back in, with realistic residual values and unprecedented opportunity.
Too often we forget that the real value of leasing occurs at end of term. Lenders are scared to death of lease returns but today’s ultra-conservative residuals mitigate that risk. Not entirely but we are certainly much better protected than years past.
And even with higher payments, the lessee has valuable options at termination. He can sell it for a profit, turn it in, re-lease it (if there are any lenders out there who understand the value of POL) or buy it out right. If he “owns” the car on a 72 month installment contract, he’s going to be driving the car much longer than most consumers would like or he’s going to take a real bath when he gets sick of it in 3-4 years.
Leasing has never been right for everyone but it is certainly a great option for those who do not drive the wheels off their cars.
The real question is, are there any lenders out there who still get it and are they willing to re-train the dealers who are missing the boat?