Zero percent, 4.9 percent, and 5.9 percent APR finance rates are doing a remarkable job of enticing customers into dealerships across the country. That’s a great thing for the automotive industry. But they have also sparked an unexpected question for many dealers: What can be done for prospective buyers who can’t take advantage of the financing incentives?

Though the rates make these deals attractive to many, the monthly payments can be excessive for some. For example, with a down payment of $1,000 plus fees, a typical 2003 Ford Explorer 4WD XLT costs $933 for 36 months at zero percent APR, or $772 for 48 months at 4.9 percent. So even if they qualify — and only about half do for zero percent financing — many buyers today simply cannot afford such payments.

This being the case, remember that all of these prospects walked into the dealership because they wanted a new vehicle. It should be the goal of every dealer to ensure that they get what they came for.

Extending the Term is Just One Answer

So what happens when a buyer says a payment is unaffordable? Typically, the dealer will use the only tool he thinks is available to him — extending the finance term to 60, 66, or even 72 months — and sending the buyer down the road in his or her new vehicle.

But though that road seems paved with gold, it may be filled with uncertainty for the customer — and the future of your dealership.

We all recognize the importance short-term financing plays in building repeat business and referrals. It is a staple of sustaining future sales and profits. But it is being quickly eroded by the recent blitz of low APR financing promotions.

By extending financing terms to 60 months and beyond, we also dramatically reduce the chance of a buyer returning to the dealership for another vehicle, or referring others.

Can this be happening in your dealership? Let’s look at some facts from CNW Marketing/Research Inc.:

• The average desired trading cycle among
consumers is 38.3 months, vs. an average finance term of 54.7 months.

• Only 18 percent of consumers financing their vehicles for 60 months or longer return to the selling dealership for their next purchase.

• The average negative equity is $2,468 per trade cycle. By the second trade cycle, the consumer’s negative equity now exceeds $5,000 — and it only escalates from there.


So, What Will the Car Be Worth in 2007?

Remember that the consumer cannot control the value of the trade. Too many factors will affect that value over the next five or more years, including the economy, model or body style changes, new-car incentives, negative or positive publicity, and supply and demand.

Today’s car values are declining more rapidly than ever before — and finance incentives are largely responsible. They’ve nudged people into buying new cars, creating a glut of used cars and driving down used-car values.

The long-term credit consumer has few or no options. All that is “owned” — the debt itself, and the risks of resale value — translates to negative equity. How can you reverse these negative factors to regain repeat business and referrals?

The answer is simple: Offer every customer a purchase AND a lease option and let them make the choice!

Leasing: Still a Very Profitable Alternative

Especially in the face of low finance rates, many of us have been led to believe that leasing is going away and is no longer a viable option. But that could not be further from the truth. The main reason leasing grew steadily during the late 1980s and early ’90s was that dealers came to understand its benefits, and how to sell those benefits to the consumer.

CNW states that 40 percent of the automotive buying public listed “lower payment” as the number one reason they leased — meaning that 60 percent leased primarily for other reasons. Consider the advantages of leasing that most of us know, but may have lost sight of in the recent haze of low and zero percent financing.

Benefits of leasing for the consumer:

• Lower payments

• Reduced cash outlay

• Shorter term

• No trade-in negotiations

• Able to drive a new vehicle more often

• No exposure to the uncontrollable risks of resale value

• No “rolling over” of negative equity, reducing payments and keeping them in the market

• Guaranteed Asset Protection (GAP)

• Lower maintenance and repair costs

• Options: At the end of the lease the consumer can buy the vehicle, trade or sell it, or return it to the lender with no obligation, regardless of its positive or negative value.

Benefits of leasing for the dealership:

• Shorter customer trade cycle

• In most cases the customer has to return the vehicle to the originating dealership — and a decision for vehicle replacement has to be made at lease end

• Increased sales: Having the edge over your competition which doesn’t offer the lease option

• Higher CSI: No high costs for maintenance; covered by warranty for the majority of the lease

• A lower payment translates into higher gross profits and eliminates excessive negotiation

• Better customer retention

• Builds customer base quickly

• Higher grosses = higher commissions. Higher commissions = better retention of sales force.


Returning the Customer to You

If you weigh these factors, leasing is now — as it has long been — a viable tool for growing your business.

In the case of the 2003 Explorer, a dealer could extend the customer into a 5.9 percent APR 60-month finance payment of $648 — or they could offer the customer a 36-month lease payment of $640, reducing the trade cycle by two years.

When you look at the advantages to the consumer and the dealership, it is the best alternative.

Even in these days of low finance rates, one of four consumers still chooses leasing. In addition, of those who lease a vehicle for 36 months or less, an astounding 84 percent lease again, and almost 50 percent return to the same dealer for their next vehicle. In this same group, the service-to-sales ratio is almost double, according to CNW Marketing/Research.

How many dealers can say they have a 50 percent repeat customer base with a great service-to-sales ratio? How many would like to?

Time for Action

Some manufacturers’ lease programs are not as aggressive as they once were, but the basic advantages to leasing for the dealer and the customer have not changed.

Don’t forget that many people entered their first lease because of the options and flexibility leasing gave them — not because the payment was that much lower. Those advantages are as important now as they’ve ever been!

It is in the best interest of your dealership — and your customers — to present the benefits of leasing to every prospect. Take action now. The future of your dealership is in your hands. n

Karen Dillon is executive vice president of LML Technologies. For more information visit