Leasing: Boom or Doom

I didn’t need to see Experian Automotive’s second-quarter data to know that leasing is back in a big way, with the transaction type accounting for 27.65 percent of all new vehicles financed during that period. In fact, I wrote about the expected boom in leasing in the April 2012 issue of this magazine, but not even I could predict what I’m seeing out in the field.

For many F&I professionals, the return of leasing hasn’t necessarily come as good news, as the transaction type doesn’t offer the kind of income opportunity traditional retail deals offer. So, like I did last year, let me provide you with some perspective on what’s currently driving leasing and what it means to the F&I office.

The Leasing Push
First, the leasing boom is primarily being promoted by the manufacturers. They are offering some nearly irresistible incentives for consumers to lease rather than purchase a new vehicle. And dealers are taking advantage.

These incentives can range from absorbing a customer’s negative equity in the lease calculation, inflated residual values, lower lease calculation rates and even lowering the qualifications for credit approval. Many of these incentives are unprecedented and obviously put the manufacturer’s lending arm at inflated risk.

So why are they being so aggressive? Well, a lot of it has to do with some troubling length-of-ownership statistics, as well as a general trend among consumers to wait longer to buy a new car. Research data from Polk reveals that in 1990, the median age of vehicles in operation in the United States was 6.5 years. In 2007, the median age jumped to 9.4 years.

And from the manufacturer’s viewpoint, this trend is still moving in the wrong direction. In June 2011, the average passenger car on the road was 11.1 years old, up from 11 in 2010 and 10.8 in 2009.

Light trucks are aging even faster, averaging 10.4 years in 2011, up from 10.1 in 2010 and 9.8 in 2009. Overall, the average age of vehicles on the road is 10.8 years, up from 10.6 in 2010 and nine in 2002.

One obvious solution to stem this trend is for the manufacturers to get people out of long-term auto loans and into a three-year lease cycle. Hence, more and more aggressive lease programs.

Popular Lease Products
The lease menu and presentation process is a hot topic for F&I managers, and one of my firm’s most downloaded web offerings. Of course, the question I often field is: What products are F&I managers having success with using your lease process? I bet many of you are wondering the same thing, so I took a look at actual performance numbers for a representative group of our top performers to see which products they were having success with on leases. The following are my findings.

Product 1: Prepaid Maintenance
This is universally the hot seller. While many F&I managers struggle with this product on retail deals, it’s selling like popcorn on leases. That isn’t surprising to us old timers who remember the “Gas and Go” leases of the ’80s.

Dealers like this product because it can help tie the customer to the dealership and generate service department income. Some manufacturers like Mercedes are even residualizing the maintenance, which adds to its appeal for the F&I manager.

Product 2: GAP
While most leases these days include GAP, some automakers like Toyota do not — and a GAP policy is almost a no-brainer. One note of caution: If your lease includes GAP, don’t get caught selling a GAP policy on top of it.

Product 3: Paint and Fabric
These are big sellers. Consumers know that they are responsible for the condition of the vehicle at the end of the lease, and these products assure that the vehicle will retain its interior and exterior integrity. And you can tell your customers they won’t ever have to wax their vehicle again.

Product 4: Excess Wear and Tear
This type of coverage is quite popular simply because of the customer’s concern for any liability at the end of the lease, making it a no-brainer.

Product 5: Tire and Wheel
With the cost of tires and custom alloy wheels, this product has appeal for budget-conscious buyers. It does especially well with highline vehicles with very expensive wheels and tires.

Product 6: Dent Protection
Everybody gets those pesky parking lot dings. But on a lease, your customer is responsible for that damage. This coverage alleviates the concern of having to pay for those repairs at the end of the lease.
I have found that offering three of the products I covered seems to produce the best results. Of course, that depends on the process you use to present them. Whatever process you use, consistency is the key. And I think we can all agree that if you don’t offer a product to a customer, they probably won’t buy it. That’s been the case with most F&I managers when it comes to lease deals.

Over the past several years, as leasing became less popular in many parts of the country, F&I managers viewed leases as an irritation they had to deal with occasionally. But as leases become a bigger percentage of your business, it will be important to have a strategy to maximize the product sales on those deals.

In last year’s article, I provided a link to a program developed with our top performers to maximize the sale of F&I products on lease deals. If you are looking for an easy way to present your products on leases, give our process a try. It’s free and surprisingly effective. You can find it at www.teamonegroup.com/leasemenu.html.