How & Why Credit Unions Are Outpacing the Market With Vehicle Leasing

Of all the change and uncertainty we’ve been through as an industry, one thing has held true throughout: It’s all about the payment. Sounds simple, right? And maybe even a bit obvious. After all, many people are no longer as interested in owning as they used to be. Renting and subscribing are more the order of the day. According to the Global Banking and Finance Review, 70% of business leaders say subscription business models will be key to their prospects in the coming years. According to Zion Market Research, the subscription and billing management market was valued at $3.8 billion in 2018 – and is expected to reach $10.5 billion by 2025. And while we can all agree on the importance of “the payment,” this desire is actively changing consumer financing preferences in surprising ways, while limiting their options. Market forces are putting pressure on buyers. Prices are too high – and inventories still so low.

Supply chain issues forming in 2020 and 2021 have caused OEMs and captive finance companies to actively pull back and in many cases eliminate incentives.

Shocker!

And, it’s not just rebates. Low interest rates and subvented residual values are scarce as well. And it makes perfect sense: Why would captive financial institutions offer incentives when the vehicles that dealers have are selling fast – and at full retail? They don’t need incentives.

Here’s a pretty typical captive finance scenario playing out on dealership lots: A customer coming to the end of his/her lease gets to choose between another lease for a similar vehicle – and hundreds more per month – or a 72-month loan for an even higher monthly payment. Excluding some cars, leasing for 39 months compared to a loan for six years can still be approximately $100 less per month. But that’s the best of two bad captive choices, and a scenario that leaves the dealer without any good options.

The result is sticker shock and a rethinking of options. Consider, for example, that pre-pandemic leasing was almost 30% of the new car market. In some states, it was over 60%. According to the most recent Experian Automotive Report, in Q2 of 2022, overall vehicle lease penetration dropped to just under 20%. All of which makes it appear as though leasing is unattractive and costly.

Blame the pandemic. Or, more accurately, blame the inventory shortages that were at least partially caused by the pandemic. The point is that captive finance companies aren’t pushing leasing as much as they did before because natural demand is stronger. As a result, this important payment option for consumers seems to have vanished.

But dig a little deeper, beyond the captives, and you can find gold.

Credit unions that participate in leasing are up nearly 50% because affordable leasing gives shoppers the power of more payment flexibility, while also keeping their vehicle under warranty. It’s an opportunity born from the alignment between high interest rates, the absence of incentives, and the high price of vehicles – an opportunity your members (and all consumers) have noticed. At nearly 26%, credit unions are experiencing their highest overall share of the auto finance market in five years – a percent of share that’s just 2% below banks.

Here’s a real-world example: According to John Hendricks, senior vice president of lending at the $979 million St. Mary’s Credit Union in Marlborough, Mass., they were not only able to provide members with a car buying alternative, but also effectively grow an auto portfolio at a rate they hadn’t seen in some time. Hendricks said: “With the price of cars continuing to increase, leasing is becoming more prevalent and is now a necessary tool for credit unions to remain competitive in the indirect space.”

It’s true that captives will always lead new vehicle financing, but credit unions are making important headway: Credit union leasing is proving to be a strong antidote for the inflation flu. It also serves as a balancing force that counters the heavy volume of indirect used vehicle business. It’s not uncommon to hear about a credit union that enjoys a record-breaking month in its indirect financing, only to learn that it’s 75% used. Leasing, as a predominately new vehicle option, helps to balance the plethora of used vehicle financing with the best kind of customer: One that learns to appreciate the local nature of customer service excellence of credit unions and has a reason to come back for their next loan … every three years.

In a volatile rate environment, with economic pressures weighing down on members, leasing is a short term, low risk, strong yield option that gives members more payment flexibility and credit unions returning business. That might seem simple – but it also sounds like a very successful strategy.

Mark Chandler is Vice President, Business Development for CULA in San Diego.