Leasing on rise and being ‘done right

By Jared Oundo

Leasing can mitigate the inevitable sales downturn by forcing well-to-do buyers back into the market when sales are falling and they might otherwise sit on the sidelines.

Although leasing is on the rise, it is “leasing done right” this time, in contrast to “leasing done wrong” in 1999 when leases last peaked and ultimately damaged residual values dramatically,

In 2015, new-vehicle sales through leases reached their highest level ever, “just shy of 4 million” vehicles, or 28 percent of new light-vehicle sales in 2015, according to the report.lease 83403

BMW sold 60 percent of its new vehicles in 2015 through leases. Leases accounted for 54 percent of Mercedes-Benz’s new-vehicle deliveries.

The report notes that leasing is no longer just for luxury vehicles. Honda, for example, sold 32 percent of its new vehicles through leases. Citing data from Experian, the report said the Honda Civic had the highest unit volume of sales through leases.

Easing the downturn

leasing can mitigate the inevitable sales downturn by forcing well-to-do buyers back into the market when sales are falling and they might otherwise sit on the sidelines.

On the other hand about 3.1 million off-lease vehicles are expected to return to the market in 2016, up from almost 2.6 million in 2015. That pool of vehicles is expected to grow to almost 3.6 million in 2017 and almost 4 million in 2018, potentially putting downward pressure on used-vehicle prices.

The following are selected excerpts from the leasing portion of the 93-page report.

An improved leasing model

The previous peak in leasing in 1999 was “leasing done wrong”: the wrong car (the one that couldn’t be retailed), the wrong customer (the one who couldn’t get financed), the wrong residual (guidebooks were overly optimistic, and that residual was bumped another 5 points or more in the lease contract), and the wrong remarketing process (or, to be honest, there was no remarketing process at all).lease

Today, for the most part, we have “leasing done right”: the right car (one the lessor wants to get back), the right customer (one who wants to trade on a regular cycle and wants to avoid the residual risk entailed in a long-term finance contract), the right residual (analysts have become better forecasters, and when residuals are subvented, lessors often hold reserves), and the right remarketing process (a holistic approach that is planned in conjunction with the origination process).

And the right term

Ideally, lease customers should fall into the higher credit tiers — and, for the most part, they do. In the third quarter of 2015, 75 percent of all lessees were either in the prime or super prime credit tier, and their average FICO score was 715. For new vehicle buyers in a retail finance contract, only 70 percent were in the prime or super prime category, and their average FICO was 710.

That sounds good and makes sense; but when Experian looked at the average FICO between loans and leases for individual models, they generally found lower FICOs for the leases. That’s not good. Leasing should never be used to simply move metal or put customers in a vehicle they can’t otherwise afford.

Likewise, in most cases, the term of a lease should be for three years or less. On that front, the industry is holding true, despite lengthening maturities for retail loans. The bulk of new vehicle leases continue to have a term between 25 and 36 months, according to Experian.

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