Once upon a time, just about anyone could walk into a new-car dealership and, with little or no money down and minimal hassle, drive away with a luxury car or SUV that they otherwise couldn’t afford. Their new ride came courtesy of a thriving economy and captive and
non-captive lenders who were sure that leasing was good for everyone.
They were right. In the golden age of leasing, for a low monthly payment, the buyer drove off in a nicer, more expensive car or truck than they could ever hope to buy, and they got to trade it in for a new one every two to four years. Lenders streamlined qualifying criteria and underwriting to fill their books with loans. They earned satisfying returns when they packaged and sold their portfolios to investors. For the dealerships, each lease was essentially two deals in one — first the transaction, then the trade-in sale when the lease expired.
Then came the subprime mortgage crisis and resulting credit crunch, which caused many lenders to abandon their freewheeling ways. Add skyrocketing gas prices and a sudden disdain among consumers for gas-guzzling SUVs and high-end sedans and, all of a sudden, auto leasing became a business with more liabilities than rewards.
There’s little doubt the recent news that the “Big Three” and several major, institutional lenders are eliminating their no-longer-profitable auto lease programs will dampen an already stunted new-car market. That will drive many more buyers to seek manageable car payments, and used-car dealerships will be waiting. On the lending side, that same news is likely to drive more sales and lease opportunities into the arms of thousands of credit unions, local banks and boutique financial institutions.
How large is the opportunity for used-car dealerships and local lenders? The most recent data from J.D. Power and Associates shows that leases accounted for 55 percent of total sales at Daimler AG’s Mercedes-Benz; 43 percent at Toyota Motor Corp.’s Lexus; and 42 percent at General Motors Corp.’s Cadillac. What’s more, eliminating leases may accelerate the inventory shift on new-car lots toward smaller, lower-priced cars that fit the pocketbooks of price- and payment-oriented car buyers.
The net result? Expect many new-car dealers to shift their inventory toward smaller, lower-priced cars and drive marginal qualifiers to their own used lots. But can manufacturers shift production away from larger vehicles and trucks fast enough to meet this fast-growing demand for more fuel-efficient models, and what does a dealer do with all those gas-guzzling lease returns?
Adapting to the new market
Savvy dealers are gearing up to take advantage of these trends by adapting their businesses to serve today’s buyer. It’s no small task. Completing it requires the ability to manage the attendant operational and financial risks that accompany a changing marketplace. Dealerships that can adapt to these new demands by investing in their image, expanding their inventory and providing consumers with viable in-house financing options or a broader network of local lenders will be more likely to survive and thrive in this challenging new era.
Right next door, in towns and cities across America (and on the Internet), there are thousands of self-funded, small- to mid-sized local credit unions, privately held banks and other financial institutions that can help dealers fill the leasing gap. As larger financial institutions move away from leases and consumers move away from leasing new cars to buying cheaper, smaller used cars with payments they can afford, these local lenders are in a position to grab market share — if they can refine their approaches and establish good working relationships with used-car dealerships.
Without “the big boys” involved, dealerships and smaller lenders share a common challenge: How do we capitalize on this expansion?
Like the major lenders, BHPH dealers and local and regional lenders will generate enough additional operating capital to enable them to take advantage of this emerging opportunity by selling their seasoned loans to investors. Many will do so using innovative new online technologies and tools to price, list, accept bids, sell and close anywhere from one to hundreds or thousands of loans at a time. These systems already can handle most retail installment loan contracts and eventually will be capable of handling lease-to-own transactions as well.
As new-car dealerships and national lenders learned long ago, more cash from sales of loans means more capital to fund new loans and other aspects of operations. It also creates the opportunity for greater flexibility to offer a wider variety of vehicles on the lot. Those used-car dealerships and local lenders who can effectively use these proven techniques to translate opportunity into profitability will be the winners in the next golden age of leasing.