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.
Automobile manufacturers are using sub-vented leasing programs that allow them to offer extraordinarily low rates, inflated residual values, or both in order to make leasing more attractive. The customer can still get more vehicle for a lesser payment by leasing. Leasing, if done properly, can still mean two to three vehicles over the 72-month term of a typical retail loan. Manufacturers like leasing because it allows them to control the future value of their vehicles. If the bulk of leasing goes through the captive finance arm, they can set the residual value on these leases, which can directly affect used-car values. High residuals mean higher resale values. Just look at American Honda Finance Corp or GMAC, which will advance the higher of book or auction price for used vehicles purchased by the dealership at off-lease sales.
Additionally, leasing answers the age-old question, “What’s my payment?” Dealerships should utilize leasing to promote lower payment options. This is always of interest to customers.
So, where is leasing heading? According to a recent article in Automotive News, leasing sales increased 21.5 percent in the first nine months of 2006. So is leasing going to recapture its heyday? Or will it remain just an option for a car buyer?
The one factor that can make or break your future leasing potential is your F&I manager. Since most leases are short-term (i.e., term and mileage of lease contract does not exceed new car warranty), GAP insurance is included. Additionally, sub-vented rates may not allow for any dealer mark-up (rate participation). Excess wear-and-tear coverage would seem to be natural, but many lenders are reluctant to advance for it. The only way to include it in many leases is to add it to the price of the vehicle. The opportunity for F&I back-end is limited at best, and leaves little incentive for the F&I manager to really get behind leasing.
Since there are no major impediments to the manufacturer that would halt their participation in promoting leasing, what is the downside of leasing for dealerships? Leasing has to be used selectively. Be careful to whom you offer a lease. The customer that drives too many miles will be in for a rude awakening when the mileage penalties hit at lease end. The marginal credit customer, who may get approved on a second-tier sub-vented lease, may have a hard time paying for the 100/300 liability insurance most leases require, especially since many insurance companies now use credit scores to determine premiums and rates for car insurance. Early termination liabilities must be fully disclosed and customers must understand their obligations under the lease. Dealerships must realize that a customer who makes his decision strictly on the monthly payment may have a problem next time around when this vehicle is no longer available at this low monthly payment. Another SSI score bites the dust.
It is important to consider what we do with the customer who comes in for that advertised low-monthly payment and doesn’t qualify for the program. If we already know that approximately 50 percent of the clientele surrounding a dealership falls into the subprime category, how do we address this issue? Be tactful when explaining how leasing typically requires better credit than traditional financing.
Be ready for customers who may currently be leasing their vehicles, but things have changed for them in the last few years. Economic conditions throughout the country have dramatically affected credit scores in the last few years. Good people have been hit with hard times. And while they may appear to qualify on the surface, many come in looking for a low-lease payment to fit their new limited budget and may be disappointed when they cannot. This is why it is imperative that you are asking the appropriate questions when qualifying your customers on the lot.
Leasing is not for everyone on every deal. Leasing, like special finance, must be worked properly to be effective. Make sure you have it available for anyone who asks, but make sure you’re leasing for your customer’s benefit, not yours. Remember what put leasing on the critical list is still lurking, and best practices need to be reviewed on a regular basis. Have you given your leasing department its annual checkup?
Geoff Cohen is a special consultant to www.subprimeconsulting.com. He has more than 25 years of experience in the automobile industry and has been fortunate to have held every seat in the dealership. E-mail Cohen at [email protected].
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