Because car buyers come in all shapes and sizes, meeting the needs of the vehicle-buying population should go beyond a one-size-fits-all approach. When a member is shopping for a vehicle, credit unions should provide as many options as possible – especially to millennials, a group that is starting to define the lending landscape. While applications for leases grew 7% in 2016 over 2015, in the last five years leasing has increased by double digits (from 16% to 33%).
Overall, there was a 49% increase in millennials with a lease contract on a new vehicle between 2012 and 2016, according to Dealertrack. Their influence will only continue to grow as their buying power increases. Providing a lease option will not only attract this segment of the population, but also provide a healthy boost for a credit union's loan portfolio. With one of every three new cars being driven off the lot via a lease, being part of this all-time high will be an important consideration for credit unions.
While leasing accounts for one-third of the autos financed in the U.S., in some regions that number is much higher. In the metropolitan New York City area, dealers reported up to 70% of all new car sales are financed through leasing, and the same is true in South Florida, Southern California and Michigan. The reason these areas experience a higher than national average leasing rate is the environment is just right for it. Urban professionals are looking to take advantage of the monthly cost savings and are also able to meet the required low mileage allowances. Other reasons for obtaining a lease include getting more car for your money, enjoying fewer maintenance headaches, putting less money down and being able to drive a new vehicle every three years. Another bonus is a vehicle financed through a lease can cost up to $100 less monthly than if it is purchased through a traditional loan. Experian reported a new loan in the third quarter of 2016 cost an average of $495 monthly compared to a new lease at $405 monthly. This represents a huge savings for many members who can keep their mileage within the limits of the lease while preserving the vehicle's resale value.
While new loan financing continues to be the number one route to obtaining a vehicle, credit unions need to be competitive at all stages of the buying process. For instance, if your credit union is located in an area where leasing makes up nearly 70% of new auto financing, you'll be competing for only 30% of the buyers. Credit unions with a lease program can compete as full-service lenders and penetrate the entire market. Let's also remember leasing attracts consumers with high-quality credit as most leases go to those in the prime and super-prime category.
Leasing has also evolved to meet the driving habits of the consumer. A trend we are seeing is that lenders are offering low-mileage leases. A traditional lease used to limit the driver to 15,000 miles a year, which was a standard offering. We are now seeing the majority being written for 12,000 miles, and there are even lower mileage options offered at 10,000 and 7,500 a year. Credit unions and dealers can use the low pricing associated with a lower-mileage lease for advertising purposes, as many members are not aware of the tiered pricing available.
One area of leasing that is not seeing much movement is pre-owned leasing. Not all vehicles coming off a lease can be considered for this area – mainly, vehicles that will maintain their value and are popular with the consumer are good candidates. The best pre-owned vehicles for re-lease, according to Consumer Reports, are luxury cars, sports cars and some of the more expensive SUVs, all of which hold their value. The numbers remain relatively low for pre-owned leasing, however, and some look at it as akin to renting because it is very short term. Experian reported used car leasing accounted for 3.7% of the lease market in Q3 2016, up from 3.3% in Q3 2015.
In looking at a lease program, due diligence is recommended. When choosing a partner, it is important to ask for and review references. Partner with a company that has a proven track record and has been through several lease cycles with its credit unions. Discuss all aspects of liability your credit union, if any, will bear at the end of the lease. For example, some programs make the credit union responsible for collecting excess wear and tear, over mileage, termination and other fees. Other programs will assume the responsibility for this. It's important to review the fine print. Understanding the opportunities along with choosing a solid program that provides your credit union with the right protection will be a winning combination for growth.
Frank Rinaudo is SVP for GrooveCar Inc. He can be reached at 631-454-7500 or [email protected].
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