There was a lot of buzz about leasing at February’s NADA Convention. Recent numbers indicate the pickup in leasing last year will continue in 2012, but is there a limit to how much this transaction type can grow? That’s up to the manufacturers, and a little history lesson might provide some clarity on just how far they will take it.

Yes, there has been an obvious resurgence in new-vehicle leasing, but consider the source: Dealers who are reporting any significant increase are doing it as a result of heavily advertised and factory-subsidized incentive programs. The brands that don’t have these incentives are still delivering a relatively small percentage of leases.

The big question is why some in the industry would think leasing is a good thing when dealers currently have access to the lowest interest rates in recent memory. Well, from the manufacturers’ standpoint, leasing represents a way for them to sell more new vehicles — not only today, but three years from now, when those leases expire. It’s good for the manufacturer lending arms as well, as they are only committing their money supply for three years instead of five, six or seven.

Leasing can be good for dealers, too. Gross profits, brand loyalty and dealer retention are much higher on leases than on retail deals, and a 36-month lease brings customers back to the market much faster than a long-term retail finance deal. Lease-return vehicles also are critical to restocking the used-car market, which helps bring prices down.

And let’s not forget the customer. In one study, 44 percent of new-car buyers owed more on their trade-in than the trade allowance shown on the retail order. Leasing solves this problem and allows the customer to drive a car they might not be able to buy.

Growing Pains

But before we get too excited about the potential growth of leasing, let’s run through that history lesson I mentioned earlier. There have always been specific market conditions that cause higher levels of leasing, just as there are conditions that cause it to become less popular.

Leasing first began to gain traction in the early 1980s. At the time, the industry struggled to recover from the debacle of the mid-to-late ’70s, when clean, late-model used cars were in short supply and interest rates on conventional loans were fairly high. Manufacturers and dealers looked to leasing as a way to get people into new cars.
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The company that really caused the leasing “boom” of the 1980s was Ford Credit and its Red Carpet Lease program. By the middle of that decade, Ford’s captive arm began aggressively marketing its entry-level vehicles to people with marginal or very little credit by approving them for two- or three-year leases at a payment that was the same or less than that of a used car. They were able to buy anyone with a job and a pulse, and America’s highways were filled with shiny beige and light green, base-model Escorts and Tauruses. It was a brilliant program.

But after a few years, things started to change. First, the increased supply of those off-lease vehicles caused used prices to drop. While that seemed like a good thing to dealers, the lenders were taking it on the chops because of their inflated residual value estimates.
I remember standing in the lane at the auction back then, buying three-year-old cars for $2,000 below what I knew was the residual value the lender used to compute the original lease. As a result, residual values plummeted to the point where leases just weren’t a good deal any more.

Interest rates on conventional car loans then began to drop as well, making leasing less attractive to consumers. To reduce the payments, dealers started extending the terms on leases to 48 or 60 months. As a result, the percentage of leased vehicles declined dramatically.

Lessons Learned

So, how does all this apply to leasing in the current market? Well, there is no doubt the supply of clean, late-model used vehicles is very low. As a result, used cars are selling at auction for very close to retail prices. And they are hard to get, even at premium prices. Because of that, new-car dealers are retailing older, higher mileage vehicles they were wholesaling just a few years ago. Those current market factors will probably produce higher residual values than normal.

Another factor that plays into the growth of leasing are the historically low interest rates available for conventional financing. Manufacturers will have to maintain very strong incentives and very optimistic residuals to maintain leasing as a competitive alternative, and history tells us that can only last for so long.

You can say all you want about the long-term benefits to the dealer, the lender and the industry, but, as it stands, leasing doesn’t do much for the F&I manager. We just have to accept the fact that the factories are committed to a leasing strategy for the foreseeable future.

My company just finished an update of our leasing presentation by conducting a field study with a select group of our top F&I performers. Our primary focus was to determine how to maximize the sale of F&I products to lease customers.

While income on leases was lower than on retail deals for these producers, we found there was some money to be made and some products to be sold. But the product mix that attracted lease customers was definitely different from the retail side, as was the most effective presentation.

One upside is that some of you F&I managers can still make a reasonable reserve on leases. If you can hold some reserve, fine. But many of you are paid a flat fee or no reserve at all on leases. I am always amused when lease providers make a big deal out of paying a flat $200 for doing the lease paperwork. Gee, thanks a lot.

Either way, there is some money to be made by presenting products on a lease deal. First, you need to decide which product you want to present. Paint and fabric, windshield, road hazard, GAP, tire-and-wheel and wear-and-tear protection seemed to do well with lease customers.

One product that surprised us during our field testing was prepaid maintenance. Penetration rates for PPM on retail deals have been somewhat spotty, but it was quite high for three-year leases. It’s what we used to called a “Gas and Go” lease back in the 1980s. They were very popular.

We took the results of the field study into real F&I offices around the country and, through trial and error, developed a new process for selling products on lease deals. The process uses one of our copyrighted documents and is normally only available at one of our training events, but we decided to share the approach with readers of F&I and Showroom magazine. You can also download it by going to www.teamonegroup.com/leasemenu.html.

Remember to read the instructions, watch the short video and put what our top performers have developed to good use. Hey, it really works.

George Angus is with Team One Research and Training, a company specializing in scientific, research-based program development and training. E-mail him at george.angus@bobit.com.