The Future of Leasing

Here is my response to Marcie Belle's post at AutoFinanceNews.net:

Marcie - If there’s one component of finance that’s gotten hammered hard in the past year, it’s leasing. Like lenders, lessors have tightened underwriting across the board. What makes things more difficult is the fact that so many lessors have curtailed their businesses or exited the market altogether.

In a nutshell: Fewer providers are offering leases, and of those that remain, qualification standards are tough.

Technically, it would seem that leasing would be a popular option these days, with car buyers seeking the lowest possible monthly payments. But because lessors have reined in residual value estimates, monthly payments are not that much cheaper than loan payments. Put simply: Leasing has lost its edge.

In its heyday, leasing commanded about a third of the financing market. These days, I wouldn’t be surprised if the ratio were closer to 10%.

Will leasing ever rebound? Sure, when the memory of residual value losses fades. For now, though, with financiers scrambling to survive the current new-vehicle-sales nosedive, leasing will remain elusive.

Jeff - The future of leasing is really about closed-end consumer leasing and it should be bright!

Everyone believes that today's lower residuals are such a negative. ALG and RVI have pulled way back and the typical reaction is that a consumer will never go for a lease when the payments are not artificially low. That is far from the case - IF the dealer knows how to sell a lease properly. And that's a very big "if" because not many do.

When residuals are high, a blind dog can sell a lease. But this short-term gain has proven to be a loser for everyone at lease end. Lenders lose at termination, dealers lose a now distrusting customer and the customer looks at his next car's higher lease payment and eschews the lease for a 72 or 84 month retail payment.

Where is the logic in that? And why is it that consumer leasing companies like D&M Leasing in DFW are still leasing 500+ cars per month?

The few leasing lenders that remain would be well served to re-educate their dealers on how a more realistic residual is GREAT for the consumer. Those that are not in the game today have a perfect opportunity to get back in, with realistic residual values and unprecedented opportunity.

Too often we forget that the real value of leasing occurs at end of term. Lenders are scared to death of lease returns but today’s ultra-conservative residuals mitigate that risk. Not entirely but we are certainly much better protected than years past.

And even with higher payments, the lessee has valuable options at termination. He can sell it for a profit, turn it in, re-lease it (if there are any lenders out there who understand the value of POL) or buy it out right. If he “owns” the car on a 72 month installment contract, he’s going to be driving the car much longer than most consumers would like or he’s going to take a real bath when he gets sick of it in 3-4 years.

Leasing has never been right for everyone but it is certainly a great option for those who do not drive the wheels off their cars.

The real question is, are there any lenders out there who still get it and are they willing to re-train the dealers who are missing the boat?