BAY SHORE, N.Y.-Auto leasing has made a comeback, reaching its highest levels since 2008, when the recession began pulling millions of lease customers out of the market.
Ironically, analysts indicate, it's the weak economy that's bringing many lease customers back, citing the fact many Americans don't have as much money on hand to put down on a new car and can afford a higher-dollar vehicle through a lease.
Analysts said CUs are paying attention to the resurgence, and that those credit unions located in leasing hotbeds-such as California, Atlanta, and the Northeast-should be zeroed in on the opportunity. But one credit union lender is cautioning about quickly forgetting risk issues associated with leasing that severely hurt lenders when the recession arrived.
In the Northeast leasing is taking off, according to several reports. Ricky Alessi, general manager at Atlantic Honda, told Credit Union Journal that leasing represents 63% of the dealership's new car business.
"People used to be able to put down $4,000 to $7,000 on a new car purchase without blinking an eye. Now that money is spent elsewhere, on monthly household needs. With a lease they get a nice low payment, and it keeps some money in the bank as a cushion."
Evolution In Lease Penetration
Alessi added that leasing's comeback is also due to rising car prices. Scot Hall, EVP of operations at Swapalease.com in Cincinnati, agrees. Hall pointed out that leases have traditionally been dominated by high-end luxury vehicles, which still command the biggest leasing share.
"But we are seeing a great deal of lease penetration in midline autos, like Buicks. We have not seen this before. Leasing has bounced back in a big way."
January credit approvals on Swapalease.com were 23.1% higher compared with the average approvals rate during the last five months of 2012, said Hall. The EVP said higher used car values are leading to higher residuals and lowering lease payments.
"Another factor improving lease penetration is all the new technology on cars," stated Hall. "That is where most of the improvements are with new models now, like onboard wifi or iPad interfaces. Technology gets old quick, and this is making people want a new car more often."
Kevin Tynan, senior automotive analyst for Bloomberg Industries in Princeton, N.J., said according to numbers from Edmunds, lease penetration of all car transactions was 25.9% as of February. "This level of penetration indicates manufacturers and finance companies are looking for more lease buyers. They are getting aggressive with lease deals to pull more buyers into the market."
According to Experian, lease share of new car financing has increased to 24.79%, up from about 20% in 2008 and 2009. "Leasing had really fallen off. But now it's returning to more normal levels," said Melinda Zabritski, director of automotive credit at Experian, Costa Mesa, Calif.
For the Hauppauge, N.Y.-based GrooveCar, leasing has been growing sharply in the past two years. "We saw strong growth last year, and comparing February 2012 to February 2013 we are up 130%," said Frank Rinaudo. "You have dealers in this area that do as much as 70% of all their new car deliveries in leases."
'Bad Memories' Forgotten?
Rinaudo attributes leasing's growth in New York City, Long Island, and New Jersey to a dense population and car owners not driving far to get to destinations. "The vast majority of the leases we make are for 12,000 miles annually or less." GrooveCar, too, is seeing strong lease interest from credit unions outside the Northeast.
But Bill Vogeney, EVP/CLO at Ent FCU in Colorado Springs, Colo., cautions credit unions about being aggressive with leasing.
"I am hearing about more and more credit unions considering leasing. But I think credit unions have bad memories," said Vogeney. "If you have not been in the leasing market, you don't realize what happened many times over the years with residual values tanking. You can buy residual value insurance, but when the stuff hits the fan, as it did near the start of the recession, these residual value insurance companies are gone-out of business."
Tax Advantages & Other Issues
The CUNA Lending Council chair reminded that it's difficult to compete with banks on leasing rates because they have a tax advantage, unlike CUs, that allows them to charge a lower rate. "They get to depreciate that asset and credit unions do not. There are serious tax advantages for a bank, or a captive, to be involved in leasing."
Vogeney advised CUs that get into leasing to view it as only a niche product. "And if you are going to do it you have to be a big enough CU that you can accept the risks of even a niche market. Maybe you go into leasing with one or two dealers on a couple of different cars. I would be concerned about any kind of sport utility truck with a high residual value. All it takes is a little increase in gas prices for bad things to happen."
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