Leases help dealers weather challenging market

Since the Federal Reserve started raising interest rates more than a year ago, auto industry challenges have created a difficult environment for dealers. Auto loan interest rates have risen, monthly payments on auto loans have increased, vehicle prices have remained high and credit is harder to obtain. In June, the auto industry faced more trouble when software provider CDK Global experienced two consecutive cyberattacks that forced their systems — used by over 15,000 dealerships — offline for two weeks. The disruptions hindered some car sales in June and could affect sales volume for retailers in the second quarter. [caption id="attachment_58342997" align="aligncenter" width="1600"] (Photo/Canva)[/caption] Dealership profitability, sales volume and supply continue to normalize after the pandemic, Scott Kunes , chief operating officer of Delavan, Wis.-based Kunes Auto Group , told Auto Finance News . “We're back to the car business as it was before. It’s a consumer’s market. It’s a highly competitive market, and that's not just from the dealer perspective, but from the manufacturers’ perspective and the lenders’ perspective,” he said. “What's nice about the industry getting more difficult is it sharpens everybody.” “We're back to the car business as it was before. It’s a consumer’s market." -- Scott Kunes, Kunes Auto Group “We got a little fat happy and lost touch with what we are,” he added. "We are a customer service industry. We don't necessarily build the product. We fix it, we sell it, and so it's all about customer service for us, and that's what we are tuned back into.” Lease volume up As dealers navigate a market defined by high prices and affordability concerns, lease offerings have picked up. Leases made up 24.1% of new-vehicle purchases in the first quarter compared with 19.3% in Q1 2023, according to Experian ’s Q1 State of the Automotive Finance Market Report published May 30, the most recent data available. Dealers tend to increase lease offerings when inventory levels rise, Melinda Zabritski , senior director of automotive financial solutions at Experian, previously told AFN. The latest data indicates that rates are on a positive trajectory but remain a barrier for consumers. The estimated average auto loan rate fell by 13 basis points YoY in June to 9.83%, marking the lowest average rate in a year, according to a Cox Automotive report released July 15. Auto loan rates remain elevated compared with historical trends following 11 consecutive months of interest rate hikes by the Fed from March 2022 to July 2023. Elevated rates have pushed average monthly payments north of $700 for over a year, according to Cox. In May, the average monthly payment for a new vehicle increased by 0.6% YoY to $756, and the number of median weeks of income needed to purchase a new vehicle rose to 37.2 weeks from 37.1, according to Cox. With consumers mostly shopping on a monthly payment basis and with lease payments generally $100 lower than a loan payment, several lenders have increased their appetite on the lease side, Kunes Auto’s Kunes said. “We're still seeing rates being much more competitive in the leasing space, even with some of the noncaptive lenders,” he said. Banks react Leasing is becoming more common at U.S. Bank , for one, even as the bank weighs the cost of funds in auto lending. The bank has not been as active as in prior years in the auto loan market because spreads and returns on auto loans haven’t met the bank’s standards, John Stern , chief financial officer at U.S. Bank, said during the bank’s July 17 earnings call. The bank, however, has been “very strong in terms of some of the leasing” as the lender continues to monitor for opportunities as the cost of funds improves, Stern said. “We will be very active in [auto finance], just as we have been in the past,” he said. At Ally Financial , the bank saw a significant jump in leasing activity as a result of an EV leasing partnership with an OEM in March, Russ Hutchinson, the bank’s chief financial officer said during Ally’s earnings call on July 17. Neither Hutchinson nor Ally identified the OEM. The bank originated $639 million in EV and hybrid lease originations in the second quarter , according to its earnings presentation. The bank’s total EV originations landed at $1 billion, of which 64% were leases; that percentage constituted an increase of 6 percentage points quarter over quarter and 14 percentage points year over year. Ally Financial and U.S. Bank declined to comment beyond their public earnings reports. At Stellantis Financial Services (SFS), leasing volume comprises 45% of the captive's business , SFS US Chief Executive Tommy Moore previously told AFN . The captive was created in 2021 after Stellantis acquired First Investors Financial Services . In fact, Credit Union Leasing of America lost some leasing share to SFS because it couldn’t compete with Stellantis incentives as the OEM began to rely more on its captive, Mark Chandler, CULA’s vice president of business development, previously told AFN . “It's still a payment-buyer's world and interest rates are hurting that, but dealers are seeing some luck from manufacturers that are offering incentivized rates,” Kunes Auto’s Kunes said. Rate exceptions Lenders have supported dealers amid high interest rates by approving rate exceptions, especially in lower credit tiers like subprime , where auto loan rates are higher than prime rates, Sean Murphy , finance director for Phoenix-based Earnhardt Auto Centers , told AFN . Murphy oversees lending across 17 stores. It’s traditionally difficult to get rate exceptions on auto loans as lenders are locked in on the terms they offer, Murphy said. . However, moving down the spectrum, rates are more flexible, with some lenders more willing to take some risk and alter deal structures to make monthly payments more affordable, especially given the current high-rate environment, he said. “We're seeing a little bit of that, but it's nowhere where it should be or where it used to be," Murphy said. Floorplan expense elevated Elevated interest rates are top of mind because dealer s is floorplan interest expense is higher due to increased cost of funds and more supply on dealership lots. Dealers’ floorplan expense was up 88% in the first quarter of 2024 compared with Q1 2023, according to dealership buy/sell advisory firm Kerrigan Advisors . Industrywide, inventory hit 2.91 million units as of July 8, pushing the new-vehicle days’ supply at the start of July to 116 days, which is only topped by days’ supply in April 2020, one month into the pandemic, according to vAuto data. By comparison, inventory sat at 1.98 million units on July 3, 2023, when supply landed at 56 days, according to Cox. Captive finance companies and other lenders provide floorplan credit lines for dealers to fund inventory acquisitions. When a dealer sells a vehicle, it uses part of those proceeds to pay back the loan it took out to acquire it, Joao Daher , senior analyst of consumer ABS new ratings at Moody ’s, previously told AFN . “Typically, floorplan loans perform very strongly,” Daher said. “Dealers prioritize making their payments on these loans because they’re essential to support ongoing operations. We think they’ll do everything possible to service their debt and mitigate any disruption.” Floorplan assets are considered less risky because they're backed by a vehicle, which carries a secure value, Erin Kerrigan , founder and managing director of Kerrigan Advisors, told AFN . A new car retains its value before it's sold, but once it's a used car, “it's a different story,” she said. If a dealership goes under, the OEM has an obligation to buy back the new inventory, minimizing the risk for lenders issuing floorplan loans, Kerrigan said. Still, banks have tightened credit on floorplan loans, and some have exited the floorplan space , Kunes Auto’s Kunes, said. Lenders still funding dealer floorplan have also tightened their standards, with few looking to gain market share, he said. “Floorplan is a safe place to put your money when things are good for dealers,” Kunes said. . But “floorplan [costs] can often be a dealer's demise. . If there's anything that can take down a dealer, it's typically the floorplan.” Floorplan is critical for auto retailers since it is how they can maintain a large selection for customers, Kerrigan said. “If inventories could not be financed, then the business model would change dramatically,” she said. At Earnhardt Auto Centers, new-vehicle inventory sits at 5,151 units across its 17 dealerships, and used-vehicle inventory is at 722 units, according to the dealership group’s website. “That's generally higher than where we’ve been throughout the pandemic,” Murphy said. “Pre-pandemic, we were well over 10,000 new units so we're still below where we were before, but I don't think that we would ever go back to where we were before.” With banks pulling back, there are fewer providers of floorplan financing, which limits dealers' ability to receive favorable terms, especially since interest rates haven’t started coming down, Kerrigan said. "When inventories rise, typically the dealer is going to start paying a higher floorplan expense,” she said. “Right now, it’s a double whammy of more inventory and higher interest rates.” “Right now, it’s a double whammy of more inventory and higher interest rates.” -- Erin Kerrigan, Kerrigan Advisors Lenders’ floorplan portfolios increased in the second quarter as dealers took on more supply. Ally Financial’s floorplan outstandings tallied $18.7 billion, up 8.1% sequentially and 28.1% YoY, according to the bank’s earning supplement released July 17. Commercial outstandings are also up at Bank of America , according to the bank’s earnings supplement released July 16. Commercial loans to vehicle dealers increased 27.6% YoY to $18.2 billion in Q2 and commitments to commercial loans for vehicle dealers rose to $25.5 billion in Q2, up 20.3% compared with Q2 2023. GM Financial ’s North America floorplan receivables tallied $15.7 billion , up 18.1% QoQ and 51.4% YoY. The captive held 47% market share of floorplan financing for U.S. General Motors dealers in Q2 and provided floorplan financing for 1,963 U.S. dealers. CDK attacks affect sales Recent CDK cyberattacks added challenges in getting cars off lots while operations were interrupted, contributing to a dip in sales for Q2. Though the issue has been resolved and sales are expected to quickly rebound in July after a slight dip in June , it could affect how dealers manage inventory, Joseph Yoon , consumer insights analyst at Edmunds , told AFN . “Getting rid of existing [inventory] is always a key priority, regardless of what's happening at the dealership,” he said. “If [dealers] have backlogged inventory that they couldn't move at the end of the month or they missed deliveries by X number of units, it could have affected them enough to have an effect on their floorplan .” “Getting rid of existing [inventory] is always a key priority." -- Joseph Yoon, Edmunds While the CDK cyberattacks were addressed quickly, Sonic Automotive and other auto retailers indicated the effects of the incident could linger, according to U.S. Securities and Exchange Commission and other court filings. Lender support following cyberattacks During the CDK outage, some lenders helped with paperwork to keep dealers in compliance and complete sales, Kent Ketterling, an executive manager at the Maita Chevrolet dealership in Elk Grove, Calif. “If you're in the automotive industry, it's about partnerships. It's about relationships,” he said. “When the chips are down, those are the people you go to and you rely on.” Earnhardt Auto’s lending partners reminded the dealership that it could access leads through the lender's portal, Murphy said. The dealership group’s sales are still recovering, and Murphy remains unsure of how many deals the retailer may have lost because of the CDK interruptions. Kunes Auto uses Celera Motion , not CDK, but since Ford Motor ’s scheduling portal went down due to the cyberattacks, so did Kunes’ online scheduling, affecting their ability to complete sales to some extent, Kunes said. Meanwhile, since independent dealers are less likely to use CDK’s software, smaller dealerships avoided a major disruption. . The Oklahoma Independent Automobile Dealers Association , for example, which comprises mostly used independent dealers, “were minimally affected” by the CDK incident, a spokesperson told AFN . Looking ahead Dealers and consumers continue to keep a close eye on monthly payments and affordability, themes that are likely to define the industry for the rest of the year. “Right now, automakers are .. waiting out uncertainty." -- Erin Keating, Cox Automotive Still, it remains to be seen where incentives and interest rates might land, Erin Keating , executive analyst at Cox Automotive, told AFN . “Right now, automakers are doing just what the consumers are doing, which is waiting,” she said. “Waiting out uncertainty.” Auto Finance Summit, the premier industry event for auto lending and leasing, returns Oct. 7-9 at Wynn Las Vegas. . To learn more about the 2024 event and register, visit www. .AutoFinanceSummit.com.

Leases help dealers weather challenging market

Capital One originations climb 18%

Tesla leasing penetration, deliveries decline amid competition

Related Posts

10 auto finance executives to watch in 2026

Volkswagen Financial CEO prioritizes leasing, EV strategy, Wells Fargo transition in 2026

Auto finance industry paints picture of resilience despite pressures

Tesla leasing penetration, deliveries decline amid competition

Stay Informed with Our Newsletters

The Roadmap Podcast

SPONSORED

Driving Innovation in Automotive Refunds: How Onbe and Allied Solutions Are Modernizing the Payment Experience

Navigating the Margin Squeeze: EVs, Tariffs & Pricing — A Q&A with Earnix

Enhancing credit approaches to boost conversion and dealer loyalty

Welcome Back!

Retrieve your password