Creating a Vehicle Leasing Program – and Making it a Big Success

We’ve come a long way since the dark days of the Great Recession, when new vehicle sales were stalled at 11 million units. It seemed like barely a soul could be found shopping for a new car or truck. For those of us in the automotive business back then, survival was the name of the game. The recession was an eye-opening experience that taught everyone new lessons about perspective, planning and how to prepare a business for the future.

Lessons that may soon come in handy.

Evolving Consumer Demands Impact Automotive Trends

Looking at recent reports, it’s obvious that the automotive finance sector is facing unsettling trends. Shifting consumer demands, changes in technology and the uncertainties around tariffs are all contributing factors. As 2019 was winding down, we saw consumers shift toward longer term lengths and used vehicles, thanks to new vehicles’ rising prices.

According to Experian’s report, “State of the Automotive Finance Market,” for the third quarter of 2019, new car loans averaged $32,480 and used vehicle loans came in at $20,446. Average loan terms in the third quarter were reported as a touch over 69 months for new and almost 65 months for used. Given that terms can extend to 84 months or more, it can take years before a buyer is in an equity position on their loan.

What’s more, the Experian report showed record high shares of prime and super prime buyers (60.88% and 44.75%, respectively) were choosing used vehicles. That’s a sign that shoppers are leveraging late model, lower mileage used vehicles to keep monthly payments down and vehicle features up.

Troubling Trend for CUs Also Provides Opportunity

The Experian report also spelled out a major challenge for credit unions: An increase in bank business. For the third quarter, banks captured auto loan and lease share from credit unions (and others), boosting their take of the business nearly 5% year-over-year, to 35.9%. Credit union share of total financing, meanwhile, dropped 2.3% year-over-year to 19.5%. The takeaway? In a tightening market, credit unions are losing market share to banks, often because they don’t offer the same diversity of options. When the customer wants a salad, you can’t succeed if you only offer cheeseburgers.

Indeed, knowing how to deliver what people want in a way that improves your business for the long term is a key lesson of the Great Recession. And what automotive consumers want are low payments, low commitment and a variety of options. To deliver this, and to keep consumers out of banks, credit unions need to expand their financing options. One of the easiest and most profitable ways to do this is to offer indirect vehicle leasing.

Credit Unions Prosper With Leasing

Leasing is a sustainable option for at least one obvious reason: One in three buyers who finance their vehicle chooses a lease over a loan. Freedonia Focus Reports found that motor vehicle leases were expected to reach $70 billion by 2023. The bottom line is that it’s a huge opportunity to increase yield, diversify portfolios and capture additional business – from current members and potential new members. What’s even better is that leasing is effective for both new and used vehicles.

Here are a few stories from credit unions with thriving leasing programs:

Directions Credit Union

Instituted in 1953 in Toledo, Ohio, Directions is a full-service community credit union serving over 100,000 members throughout Central and Northwest Ohio and into Monroe County, Mich. The credit union implemented leasing in 2003 at the request of members. Tim Crosby, SVP of lending for Directions, explained: “There is a Jeep plant right here in Toledo. This is a car/auto-oriented geographical area. Our members are middle-class, so a lease makes it more affordable for the average consumer to be able to have a nice car.”

Over 16 years later, the leasing program has been a huge success. According to Crosby, “[Leasing] is a very high-performing product. We have almost next to nothing in terms of delinquency and loan losses. It’s a very dependable product from a risk standpoint in that it comes with less risk than most of our other lending products.”

Alliant Credit Union

With over 80 years of history and more than $11 billion in assets, Alliant is the largest credit union in Illinois and one of the largest in the nation. When Vice President of Consumer Lending Jeremy Pinard joined in 2013, the first thing he did was investigate whether leasing would be a good addition to the credit union’s portfolio. Pinard said the key to creating an impactful auto leasing program is to take the time to fully appreciate the asset class. “It’s essential that you do the research to understand it,” Pinard said. “Once you understand the asset class, take the time and proper steps to really determine if that is a demographic you want to attract, and the type of program you want to build.”

Auto leasing was a strong addition to Alliant’s portfolio thanks to key demographics, including prime and super prime members. “Credit unions who want to add indirect or direct lending, or leasing need to understand what it takes for them to be a viable option in their market,” Pinard said. “They need to have rates and terms that are competitive. From a regulatory and performance perspective, they will need to both monitor and manage it. This kind of indirect lending requires you to have a full understanding of the entire process.”

Bethpage Federal Credit Union

Founded in 1941 with branches across Long Island, N.Y., Bethpage is the largest credit union in the Northeast region and the 16th largest in the nation. According to Chris Walsh, senior manager of consumer lending, leasing was the “springboard to give us more volume in our retail program.” That’s not a surprise, as Bethpage is at the center of one of the largest leasing markets in the country.

Walsh advised credit unions to work with leasing vendors that work closely with credit unions, and to look for things such as lease terminations that allow dealers to buy the vehicle for the same price offered to the member. “We have traditional retail products, balloon products and, by adding lease products, we were able to provide the dealer with a financing outlet for any type of product they want to sell,” Walsh said. “As soon as the dealers realized that our leasing program was market competitive, the dealers became more open to Bethpage’s indirect retail program.” Leasing allowed Walsh – and Bethpage – to build deeper relationships with dealers and sell other products like retail loans.

Ultimately, vehicle leases can be an excellent program to help credit unions add value, especially in an automotive market environment of expanding choice, increasing flexibility and rising prices. As car buyers continue to think payment first and features second, leasing becomes a strong loan product to help drive prosperity for the right credit unions.

Ken Sopp is President of Credit Union Leasing of America in San Diego, Calif.