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To Lease or Not To Lease?

January 2007, F&I and Showroom - Feature

by Geoff Cohen - Also by this author

We all heard the trumpet warming up “Taps” for leasing a few years ago. Leasing lay flat on its back in the intensive care unit, gasping its last breaths before fading off to become another F&I memory. The pulse grew weaker, and we all knew it wouldn’t be long before leasing went to that great F&I office in the sky, to reminisce about the good old days with the twins, rust proofing and undercoating, and the prematurely demised balloon note.

But wait a minute … did I hear a beep? Is there a pulse still left? There is, and it appears to be growing stronger as we go. Leasing is back, maybe not as big as it once was, but back from death’s doorstep nonetheless.

Back in the late 80s, leasing was the new mystery. Lease calculations required the knowledge of a foreign language with all the talk of residuals and money factors. As we went on, leasing became the darling of most dealerships (especially before Regulation L and disclosure came into play), and the typical leasing manager in every dealership was the highest paid employee. He or she drove the most expensive car and had the flashiest gold Rolex. He or she was your high-profit, low-payment guru who made deals magically appear from nothing. He or she knew all the lenders and all of their programs, and did the business that no one else in the store wanted to do.

Suddenly, every dealership wanted to jump on the leasing bandwagon. Through the late ‘80s and ‘90s leasing continued to thrive, with some dealerships doing better than 85 percent of their retail business in leases. Everyone realized the leasing advantage; you could sell three cars to a customer over a six-year (72-month) period as opposed to one car. The customer typically got more vehicle than he expected for the payment he was making, and, in theory, the dealership could build tomorrow’s used-car inventory from the new-car leases it made today. Soon, Lease Star, Lease Link, Lease Prophet and other leasing software programs hit the market, allowing anyone in the dealership to push a button and get a lease quote in seconds.

Suddenly, that high-paid obnoxious lease manager was no longer such a valuable asset. Overrun with vehicles with absurdly high residual values, leasing companies lost thousands of dollars per vehicle at lease end, as these off-lease vehicles went to auction. Leasing companies like GECAL, Oxford, and Bank of America got out of the leasing business when residuals got too high and interest rates went too low. Leasing remained an option from 2000 through 2005, but statistically it was not much of an option as the percentage of sales pummeled significantly.

So why the recent rebirth of leasing? It is good business for the manufacturers of automobiles. Manufacturers are learning that a 72-month, zero-percent interest program may sell vehicles, but not always profitably.

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