Leasing's Warm Welcome Back

Leasing, once the bane of the F&I department, now creates many opportunities to sell aftermarket products and earn a fair profit for the dealership.

Lindsay Cadillac in Alexandria, Va., has been heavily involved in leasing since the late ’90s. Bob Niefflein, general sales manager, says the dealership’s leasing penetration is between 60-70 percent and F&I income continues to improve.

April’s finance penetration reached 82 percent. "We try to convert as many people to a lease as we can because it is supported so heavily by General Motors," Niefflein says. "Even as leasing has declined elsewhere, we’ve found that people just love to lease."

Finance companies have begun pushing leases again after a long slump in the wake of Sept. 11, 2001. Leasing has become an appealing option to consumers faced with higher interest rates, larger down payment requirements on loans and negative equity on trade ins.

In January, 18.2 percent of all new-vehicle deliveries were leases, up from 13.3 percent in January 2004, according to data from the Power Information Network, an affiliate of J.D. Power and Associates.

"One of the main reasons for this leasing renaissance is the increase in interest rates for new-vehicle loans," says Tom Libby, senior director of industry analysis at PIN. "The average annual rate charged on new-vehicle loans exceeded 6 percent in nine of the 12 months of 2004 after being below 6 percent every month of 2003."

Klein Chevrolet-Buick-Pontiac and Klein Dodge in Clintonville, Wis., have 50 percent lease penetration in new-vehicle sales. John Klein, dealer/general manager, says educating customers about their options is the most effective way to improve leasing numbers.

"Consumers now see that zero-percent financing doesn’t help them because of vehicle depreciation."

Leasing involves fewer chargebacks, which is a great benefit to an F&I department’s bottomline, says auto leasing consultant Buzz Doering. "In some cases there are no chargebacks at all. If for no other reason then because the contracts are so much shorter."

In addition, lease customers are often interested in modifying their vehicles with special wheels, CD players and other accessories. These products, as well as plans that cover excess wear and use, are often more appealing for vehicles being leased rather than purchased. The emergence of four-year leases even creates the opportunity to sell a service contract for the extra year not covered by the manufacturer’s warranty.

Niefflein says a great thing about leasing is the ability to residualize many of the add-on products. Customers may be more likely to purchase products if they don’t have to pay the entire price for something they will only have during the length of the contract. The ability to residualize part of the price, or put it into the lease end value, allows customers to only buy the part they are using.

The shorter trade cycle can also reap benefits for a dealership. Once a lease portfolio has been created and a customer completes a three-year contract, the gross profit made on the next deal goes directly to the dealer. In a financing situation, a lot of the gross generated by the dealer has to go to the lien holder of the trade in if money is still owed.

Leasing can even appeal to consumers intending to pay cash through the one-pay lease options offered by most captive finance companies. "When I’m addressing F&I people, I tell them to show the customer that for the same payment he is going to pay his credit union, he can pay the dealership on the lease and the difference is that after three years, he can walk away," Doering explains.

The one-pay lease option is a regular lease, but the customer makes all the payments at once instead of on a monthly basis. General Motors calls this the SmartLease Plus; Ford Motor calls it the Advanced Payment Plan. Nearly every manufacturer offers some variation of this program.

Support from the manufacturers has been central to the increase in leasing. GM’s lease pull-ahead program has helped spark the market during slow times. This takes a customer out of his current lease and puts him in a new one for a new term. "It expands the customer base, keeps customers coming back more frequently and makes it easy to lease," Klein says.

Dealers and F&I managers who believe in the value of leasing will find the most success. Klein says he and nearly all of his sales employees lease vehicles themselves. He has even included leasing in an incentive program for employees. The winner of a service contract selling contest received a two-year, single-pay lease vehicle as a reward. "The employee appreciates it and it can be less expensive than a trip or a cash award," Klein explains.

Showroom leasing in 2005 will equal or exceed leasing’s best years, which were 1999 and 2000, Doering predicts. This is also attributed to the scaling back of zero-percent financing and the strengthening of wholesale used-vehicle prices.

Much of the increase in leasing will be seen in the luxury market, according to PIN. The leasing penetration increase in all five luxury-vehicle segments exceeded the industry-wide increase between January 2004 and January 2005. Leasing penetration in each luxury segment currently exceeds 33 percent, with leasing in the mid-luxury and premium-luxury auto segments accounting for more than 40 percent of all deliveries.

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