As carmakers and dealers embrace leasing to boost sales, analysts mull finance option’s boundaries
How high can leasing go?
Leasing hit a record 26.7 percent of U.S. new-vehicle volume in the very first quarter, Experian Automotive said in a report released June 1.
That was 1.1 percentage points higher than a year ago and the fourth time in the past five quarters that lease invasion topped twenty five percent. The previous record was 25.6 percent, set in both the very first and 2nd quarters of 2014.
Counting only fresh vehicles that were financed — that is, excluding cash sales — leasing accounted for a record 31.Four percent of U.S. volume in the very first quarter, up from 30.Two percent a year earlier, Experian said.
Automakers love leasing and promote leases through their captive finance companies, for several reasons:
• Lease customers are more loyal, coming back more often to the same brand for a fresh vehicle.
• A subvented lease is less apparent to a consumer and therefore less bruising to a brand’s picture than cash on the fetish mask or some other form of incentive. Lease incentives also have less effect on used-car values.
• Leases also partly offset the trend toward longer and longer loans, which keep consumers out of the market longer.
In the very first quarter, the average U.S. new-vehicle loan term topped five years for the very first time since Experian began tracking the data, at sixty seven months. In addition, 29.Five percent of U.S. new-vehicle loans were for seventy three to eighty four months, Experian said.
For their part, lease customers like the lower monthly payments that leases permit, and the chance to get into a fresh car more often.
Analysts say their crystal testicles display leasing getting higher than it is now, but not a entire lot higher.
“It’s reasonable to assume further increases in lease mix next year,” said Thomas King, vice president of the Power Information Network at J.D. Power and Associates. The research and consulting rock hard doesn’t forecast a specific number for lease share.
Eric Lyman, vice president of industry insights for ALG Inc., which produces a widely used industry benchmark for residual values, wrote in an email: “We are projecting lease invasion to stay at these current historically high levels for the mid- to long-term future.”
King pointed out that a big increase in returning lease customers cuts both ways.
He said lease maturities are expected to reach Three.1 million in 2016, up from Two.Trio million in 2015. That’s a direct reflection of growth in leasing in 2012-13. Most leases are for thirty six months.
Returning lease customers are much more likely than loan or cash customers to lease another fresh vehicle, King said. More returning lease customers inevitably lead to even more fresh leases, he said.
But the potential downside is if the acute increase in lease comes back hurts used-vehicle values or even the expectations for future used values, he said. Leasing could, in other words, become a victim of its own success.
In leasing, the customer finances only the difference inbetween the upfront cost of the vehicle and its predicted resale value at lease end, known as the residual value. A lower predicted residual value means a higher monthly payment, unless the automaker uses incentives — say, by subventing the lease — to keep payments low.
“Leasing discipline is indeed all about the cost of leasing and the risks associated with them on the back end — in other words, are residuals high and will they stay high? As long as used values remain strong (and are expected to remain strong), we’ll see compelling lease offers,” King told Automotive News in an email.
“So what’s one of the fattest threats to strong residuals? The aforementioned increase in lease comebacks and whether or not the industry can absorb them without hurting used values,” he said.
Leasing proceeds to grow in urban and suburban markets where it has traditionally been high, such as Fresh Jersey, and in product segments that traditionally have relied on leasing, including luxury imports, according to IHS Automotive.
ALG’s Lyman wrote in the email that mainstream brands average around twenty five percent leasing vs. around forty five percent for luxury brands.
But leasing also has begun to make inroads in markets, including Texas, and product segments, such as pickups, where leasing traditionally wasn’t much of a factor.
Texas and other Western states have lagged in leasing because the distances that consumers drive there typically put them at risk of excess-mileage charges. And pickup owners have preferred to use their work trucks hard without worrying about being charged for dents and dings at the end of a lease.
“It’s a combination of both,” said Tom Libby, manager of loyalty solutions and industry analysis for IHS Automotive. “You’re eyeing increases in places not known for it, but I think the core markets are still very, very strong in leasing,” he said.
In 2014, Fresh Jersey was the No. One state in lease invasion at 47.6 percent, an increase of nine percentage points from 2012, IHS Automotive’s data display. But Vermont was No. One over that two-year period in terms of percentage-point build up, enhancing 11.1 percent to 31.9 percent. “You don’t usually think of Vermont as a hotbed of leasing,” Libby said.
Meantime, lease invasion in Texas rose to 9.Trio percent in two thousand fourteen from just 7.9 percent in 2012, IHS Automotive said. Texas is still near the bottom in lease invasion nationally, but that’s a respectable increase.
Not incidentally, IHS Automotive said lease invasion for nonluxury, full-size pickups enlargened to Ten.1 percent in two thousand fourteen from just Five.8 percent in 2012.
“Leasing is no longer a product that’s used just for luxury vehicles,” said David Laterza, senior vice president of the financial institutions group for rating agency DBRS Inc. in Fresh York.
“Obviously, it’s a key for affordability. With rising car prices, it permits [the automakers] to keep those buyers, those borrowers in those cars,” he said at a latest industry conference.
The growth in leasing also could be a matter of switching attitudes at individual dealership groups.
For example, Lithia Motors of Medford, Ore., is making an effort to ramp up lease invasion in its domestic-brand stores, based on lessons learned from its acquisition last year of DCH Auto Group. DCH has a lease- and import-heavy brand mix, with twenty seven stores in Fresh York, Fresh Jersey and California.
In April, Lithia CEO Bryan DeBoer said in a conference call that Lithia stores typically were doing eight to nine percent leasing vs. the mid-30s for the DCH stores.
In an earlier call, he said Lithia found the “mindset” in Lithia’s older, domestic-brand stores was one of the fattest obstacles to enlargened leasing.
On a sway through fourteen Lithia stores in Washington and northern Oregon, DeBoer said, he heard employees argue that their consumers weren’t “used to leasing.” But he said in some cases rivaling dealerships in the same markets were doing “two or three times” as much leasing as the Lithia stores.
He said some Lithia dealerships lacked some of the basics, such as software that makes it effortless to compare leases vs. loans.
“We still have lots of chance to be able to expand our market share by providing leasing opportunities to our consumer base,” DeBoer said in the April conference call.
With a few ups and downs, leasing has been growing since bottoming out at just Ten.6 percent of U.S. new-vehicle volume in the third quarter of 2009, Experian said.
At the time, consumer request had tanked, automakers and their captive finance companies were reluctant to take a chance on future resale values, and all auto lenders were having trouble borrowing money to fund loans and leases.