If your business portfolio includes automotive leases, chances are you have already come across a few customers (or perhaps several thousand!) who are interested in getting out of their contract early. Maybe they’ve lost their job; maybe their yearly mileage is higher than they anticipated; perhaps they no longer need a vehicle, or maybe the vehicle they chose no longer meets their needs.
Thanks in part to online forums like Craigslist, Facebook Marketplace and industry-specific sites like SwapALease.com and LeaseTrader.com, it’s becoming much easier for lessees who find themselves in one of these positions to find another person to assume the remainder of their lease. The process is much like subletting an apartment; the person taking over the lease needs to meet all of the lender’s requirements, which means undergoing a credit check, submitting proof of income and agreeing to the original contract terms for the remainder of the lease.
While the websites listed above can help make the introduction between lease “seller” and lease “buyer,” they do not facilitate the rest of the transaction, other than (sometimes) indicating that the lease “buyer” needs to have a particular minimum credit score. We’ve been hearing from many lenders who have questions about how to best manage the back-end processes associated with lease swaps, especially as these aftermarket transactions increase in popularity.
Why Swaps are Likely to Continue
According to auto industry data, leasing in itself is becoming a more popular way for consumers to finance a car. Leasing makes up just under 30 percent of overall car transactions on an annual basis, but that number is growing. According to Edmunds, more new vehicles were leased in the first half of 2016 than during the first half of any other year in history – a trend auto industry insiders attribute to a “fundamental shift in consumer mindset about the value of owning a new vehicle” versus merely paying to use it, as in a lease.
Millennials are the most prominent group driving this change. This age group – those born between 1981 and 1996 – grew up accustomed to “owning” expensive items, whether a car or a smartphone, through a subscription model. Here, they pay a monthly fee to use the item, but they don’t build any equity through the process, either because the car is turned in at the end of the lease, or because the “latest” smartphone doesn’t have much value at the end of a three-year contract.
Experts are also seeing dramatic growth in auto leasing among people over 75 years old. This is another population cohort that, like millennials, grew up during an economic recession and that also falls at a low end (albeit, the other end) of the bell curve as far as annual earned income. So, for both groups, leasing offers an appealing way to fit a vehicle into limited monthly cash flow.
Aside from shifting consumer expectations, there’s also the fact that life circumstances are changing more rapidly than ever before, particularly for millennials. Americans are now changing jobs much more frequently than any previous generation (people born before 1990 averaged two job changes by age 32, while for millennials, the average is closer to four).
Finally, it’s also important to note that one’s prime childbearing years also tend to fall between the ages of 22 and 37, which makes for even more change for the millennial cohort. That compact car that was such a great deal for a single lady six months ago might not be as good a fit once she gets married and learns she’s expecting twins.
So, what does all this mean for lenders? The world is changing – whether it’s borrowers’ circumstances, their expectations or both – and lenders need to be prepared to meet them where they are. In the auto financing world, this may lead to an increase in lease swaps.
Pros and Cons for Lenders
Lease swaps come with a list of pros and cons for all parties involved. For lenders, the biggest “pro” is the opportunity a swap provides for both borrower retention (letting the existing borrower off the hook with a good experience rather than a hefty fee) as well as borrower recruitment (the person who assumed the remainder of the lease). Further, the recruitment of that new borrower didn’t cost the lender anything – not even a dip into the marketing budget.
The biggest “con,” however, is that the backend processing of lease swaps can be a “round peg” that doesn’t fit into most existing servicing systems. So instead of tracking a lease swap through their system of record, some lenders have to create laborious side processes – some even using spreadsheets – to track a swap through to completion. This is no small task. Once eligibility is established, documents such as lease transfer agreements, signed credit applications and vehicle condition reports must be collected, reviewed and processed. And as all parties work through the process, yet more documentation must be generated, reviewed and entered into the servicing system.
Fortunately for lenders, there are third-party service providers who have expertise with lease swaps and can streamline the process for lenders by using robotic process automation. Automated solutions save time, manpower and expense while reducing opportunities for error or missed communications.
Why It Matters
The auto-lease market’s shift to accommodate greater flexibility doesn’t mean that standard contract terms and financial qualifiers will go out the window anytime soon. But, if a borrower wants or needs to get out of a lease early, lenders should be prepared to facilitate a solution. Being a solution provider, rather than an entity who simply says “no” or charges fees, will help to set some lenders apart in the realm of customer service. And, with social media amplifying the reach of word-of-mouth marketing, good customer experience can go a long way these days – another powerful shift the millennial generation has helped to bring about.
Brandy Bissett serves as the business process outsourcing product manager of Fiserv Lending Solutions.Like This Post