We all heard the death knoll for leasing a few years ago. Leasing lay flat on its back in the intensive care unit, gasping its last breaths before fading off to become another F & I memory. The pulse grown weaker, and we all knew it would not be long before Leasing went to that great F & I office in the sky, to reminissate about the good old days with the twins, Rust proofing and Undercoating, and the prematurely demised Balloon Note.
But, wait a minute … did I hear a beep? Is there a pulse still left? Yes, and it appears to be growing stronger as we go. Leasing is back, maybe not as big as it once was, but back from death's doorstep none the less.
Back in the late 80's, leasing was the new mystery. Lease calculations required the knowledge of a foreign language, with all the talk of residuals and money factors. As we went on, leasing became the darling of most dealerships (especially before Regulation L and disclosure came into play) and the typical Leasing Manager in every dealership was the highest paid employee who drove the most expensive car and had the flashiest gold Rolex. He was your high profit, low payment guru, who made deals magically appear from nothing. He knew all the lenders and all their programs, and did the business that no one else in the store wanted to do.
Suddenly, every dealership wanted to jump on the leasing bandwagon. Through the late 80's and the mid 90's, leasing continued to thrive, with some dealerships doing better than 85% of their retail business in leases. Everyone realized the leasing advantage; You could sell three cars to a customer over a 6 year period as opposed to one. The customer typically got more car than he expected for the payment he was making, and in theory, the dealership could build tomorrow's used car inventory from the new car leases it made today. Soon, Lease Star, Lease Link, Lease Prophet and how many other leasing software programs hit the market and soon anyone in the dealership could push a button and get a lease quote in seconds. Suddenly, that high paid obnoxious lease manager was no longer such a valuable asset. Leasing companies, overrun with vehicles with absurdly high residual values, lost thousands of dollars per vehicle at lease end when these off-lease vehicles went to auction. Leasing companies like GECAL, Oxford, and Bank of America, all got out of the leasing business when singles got too high and interest rates went too low! And the leasing gurus, if they were smart, became Special Finance Managers!
So why the recent rebirth of leasing? Well, first and foremost, it address the number question asked in every dealership in America – "What's my payment?" Manufacturers are using sub-venting leasing programs, which allows a manufacturers offer extraordinarily low rates, inflated residual values, or both in order to create super low attractive payments. The customer can still get more car, for less payment by leasing. Leasing, if done properly, can still lease a customer two to three cars over the 72 month term of a typical retail loan. Manufacturers like leasing because it allows them to control the future value of their vehicles, (If the bulk of leasing goes through the captive finance arm, they determine the residual value on these leases, which can directly effect used car values. Resale values - just look at American Honda Finance Corp or GMAC which will advance the higher of book or auction price for used vehicles purchased by the dealership at off lease sales.
What's in it for the F & I manager? Not much in reality. Manufacturer warranties typically cover the vehicle for the term of the lease, so extended warranties are not an option. Most leases already include GAP coverage, so that's two down. What's left is any rate markup that is available and excess wear and tear coverage. If your customer is in on a nationally advertised payment, it's tough to mark up the rate to earn any profit. And while excess wear and tear coverage would seem top a natural, many lenders are reluctant to advance for it. As such, the only way to include it in many leases is in the price of the vehicle. The opportunity for F & I backend is limited at best, and leaves little incentive for the F & I manager to really get behind leasing.
So, where is Leasing heading for? In order to survive, leasing has to be used selectively. Be careful who you offer a lease to. The customer that drives too many miles will be in for a rude awakening at lease end when the mileage penalties hit. The marginal credit customer, who may get approved on a second tier sub-rented lease, may have a hard time paying for the 100/300 liability insurance most leases require, since many insurance companies now use credit scores to determine premiums and rates for car Insurance. Early termination liabilities must be fully disclosed and customers must understand their obligations under the lease. And dealerships must realize that a customer who makes his decision strictly on the monthly payment may have a problem next time around when this vehicle is no longer available at this low monthly payment. Another SSI score bites the dust!
And what do we do with the customer who comes in that low advertised monthly payment ands does not qualify for the program? If we already know that approximately 50% of the clientele surrounding a dealership fall into the sub-prime category, how do we address this issue? Be tactful, and respectful, while explaining that leasing a vehicle typically requires better credit than traditional financing. (If you are not certain of your dealership's demographics, email me and I will get you an Income & Market Analysis).
Be ready for customers who may currently be leasing their vehicles, but things have changed for them in the last few years. Economic conditions throughout the country, have had a dramatic effect on credit scores in the last few years. Good people have gotten hit with hard times, and while they may appear to qualify on the surface, many come in looking for a low lease payment to fit their "new limited budget". This is why it is imperative that you are asking the appropriate questions when qualifying your customers on the lot. (If you would like a complimentary copy of a Lot Traffic Training just email me).
Leasing is not for everyone. If you attempt to make your store a leasing only destination, like branding yourself a "special finance" dealership, you effectively eliminate a segment of the marketplace that perceives you as a place they DO NOT want to do business with. Leasing, like special finance, must be worked properly to be effective. Make sure you have it available for any one who asks, but make sure you're leaving for your customer's benefit, not yours! Remember what put leasing on the critical list is still lurking, and best practices need to be reviewed on a regular basis. Have you given your leasing department its annual check-up?