Auto leasing is all the rage in these rapidly changing economic times. Industry statistics underscore that auto leasing has experienced a 22.5% growth spurt in each consecutive month of this year and there appears to be no let-up in sight.
Credit unions that are not currently in the lease market surely have to be asking themselves, "why not?" Not only are they missing out on revenue generation opportunities and incremental loan growth, but they're also losing their members to other financial services providers that are offering a lease product.
One reason a credit union will give for not participating in a leasing program is the concern over past losses when a vehicle's lease came to maturity. Although this concern is valid, the good news is that there are companies and products on the market with better safeguards in place to ensure against losses.
So, what should your credit union look for in a lease program?
Do Your Homework
First, reach out to credit unions that offer a true lease product. Get them to share their best practices as well as what you may expect once you start the program, such as credit quality, lease-end process and competitiveness, just to name a few. Find out what companies they use and conduct your own due-diligence on companies you may want to partner with.
Additionally, seek out a program that does not compromise residual values in order to originate loans. It is critical to partner with a company that is an expert in re-marketing (lease end process). Re-marketing expertise is not a one-size-fits-all approach, but rather one that hones in on leasing vehicles that are most likely to be purchased at the end of the lease term by the lessee-i.e., streamline models vs. luxury. Balancing residuals with loan originations and re-marketing are key to a successful leasing program and improves the potential for legacy loans.
Other areas to look for in your prospective company/product are strong relationships with dealers, an established and successful business history, supported by strong financials.
The Case For Leasing
Once primarily a tool for selling luxury vehicles, leasing is now commonplace among hot-selling family sedans, such as the Ford Fusion and Honda Accord. Supported by high used-car prices, low interest rates and Americans' tendency to buy vehicles based on the monthly payments, U.S. auto leasing is at the highest levels in at least a decade and pacing the industry's best year since 2007.
Any credit union entering the auto lease market should consider that leasing offers not only guaranteed incremental growth, but the opportunity to capture a virtual untapped market. Strong lease markets are typically those where leasing accounts for 50% to 70% of new vehicles sold on a monthly basis. If you are not offering a lease product to your members, you are guaranteed to miss out on a large portion of the new vehicle market share and be forced to continue to compete in the highly competitive market of securing vehicle purchase money.
Leasing offers your members the attractiveness of lower monthly car payments coupled with maintenance coverage and no money down. These options, paired with a new market of vehicles available for leasing, have contributed to the paradigm shift in lessee demographics. One demographic of particular interest to credit unions, Gen Y, is attracted to leasing since it allows them to drive a new car with lower monthly payments, no money down and without the hassle of ownership costs.
Credit unions with a lease program will enjoy exposure to a new consumer/member stream with the highest FICO credit quality scores and from a broader range of lifestyle backgrounds. Further, with the leasing focus shift from luxury cars to mid-sized and family autos, leasing has become very attractive to an expansive consumer audience and that trend is only getting stronger.
When credit unions offer lease financing they essentially pre-empt auto dealers from sending a potential deal to multiple finance companies. Few consumer finance companies offer lease options and it is well documented that dealers will send a lease application to the lender that offers the lowest payment option for that vehicle make and model. A lease application is not "shotgunned" to five or more financial institutions as would be the case in traditional auto financing. There is a very simple reason: leasing is strictly about which option offers the lowest payment!
Moreover, auto leasing allows both credit unions and dealers to develop and sustain stronger relationships, which stands in stark contrast to one built strictly on conventional loan products. The dealer in this scenario will actively seek out a credit union partner.
Leasing is the New Normal
The reasons for leasing's strength extends beyond demographic changes and top selling car models. Industry wide gains in product quality and strong used-car prices allow automakers to project higher values for their vehicles when leases expire and those higher values allow you to offer lower rates.
Consumers gravitate to leases mostly because they offer lower payments. Melinda Zabritski, Experian's senior director of automotive credit, said the average monthly payment on a lease is about $50 less than it is for buying a new car with a traditional auto loan.
Unlike many traditional or newly created loan products, leasing has proven to be highly profitable and sustainable over several decades. More importantly, trending analysis regarding lease market penetration along with consumer spending patterns reflects a future that will be in demand and poised for continued growth.
Can you afford to wait any longer?
Robert O'Hara is Vice President of Strategic Alliances at GrooveCar, Inc., Long Island, N.Y.