Used vehicle leasing is on the rise — as the number of quarterly units leased has nearly doubled in recent years from about 20,000 to 40,000 — according to Melinda Zabritski, senior director of Automotive Financial Solutions at Experian.
However, there are still a lot of unknown risks associated with this segment of the market and it remains very fragmented, she added.
“I ran a 9-month report on (used vehicle leasing) and there were about 2,000 individual people or lessors listed,” Zabritski told attendees at the 2016 Auto Finance Summit last week. “So it’s very dispersed.”
Vehicles in these programs tend to be relatively new, with 70% of the market made up of “current year” Toyota Camrys and Honda Civics, as well as relatively newer model Mercedes-Benz and BMW vehicles, Zabritski said. However, older model cars from 2013 are starting to grow and have captured around 20% of all used vehicle leases.
There is still concern though about what the value of these cars will be when they come off a used lease term, Tom Webb, chief economist at Manheim, said.
“The limitation, of course, is that the lessor at some point in time becomes concerned about the amount of residual risk they’re holding,” Webb said. “I believe (the lessor’s) appetite to take on a significant increase in dollar amount of residual risk has diminished.”
Still, there are steps lessors can take to build a successful used vehicle leasing program, and it involves a lot of meticulous attention to detail to determine which cars are best suited, Webb told attendees.
“There are some people out there already doing it outside of the captives, and I think they do it better because they understand what they are doing,” he said said. “To a certain extent it’s better done on a small scale because of that personal relationship with your originator. I wouldn’t want to blanket (the program) to all dealers — as you have to do with a captive — I’d rather have a select dealer base.”
While this space is growing, it will be awhile before lenders, dealers, and consumers can agree on what’s best for everyone involved. “Used vehicle leasing is not new vehicle leasing with a used vehicle car; It takes a totally different strategy,” Webb said. “You have to understand the product and understand that a lot of people who have gone into it have been burned.”