The amount of off-lease inventory flowing into Kia’s certified pre-owned program will likely double this year. That’s proving fruitful for a brand that just finished its best two months ever for CPO sales.
And, most likely, the CPO market as a whole.
In July, Kia moved 7,007 certified units for a 20.6-percent year-over-year gain, according to Autodata Corp.
The automaker said in a news release Monday that this marked the second-best month it has ever had for CPO.
No. 1? That was June. Kia sold 7,403 CPO cars that month (up 21 percent).
Like much of the industry, increases in off-lease volume have helped drive nice gains in certified sales for Kia, which said its CPO numbers were up 12 percent in the first four months of 2016.
Year-to-date, Kia is up 14.8 percent with 43,935 CPO sales.
In June, Kia was joined in the record-breaking ranks by Land Rover, which also posted its best-ever month for CPO, according to Autodata.
In July — which was the second-best CPO month of all time for the industry itself — five brands (BMW, Lexus, MINI, Nissan and Subaru) reached best-ever sales, Autodata said. All told, there were 234,243 certified sales, beating last July’s figure by 5.6 percent, the firm said.
There have been 1.56 million certified vehicles sold so far this year (a 4.1-percent increase, Autodata said) and comments from Autotrader’s senior analyst in Kia’s news release suggest the industry could go much higher.
“CPO sales growth will skyrocket in the near future, approaching 3 million in the next couple of years and surpassing 4 million by the end of the decade,” Michelle Krebs said.
“A robust CPO program will be critical to automakers and their dealers to build sales and customer loyalty, and maintain strong residual values for leasing customers and buyers trading in their vehicles,” she added.
One of the ways in which automakers can drive more of the off-lease volume to CPO is through the lower mileage allotments on leases, says Edmunds.com.
In the company’s Lease Market Report for the first half of 2016, Edmunds said that the average annual mileage on leases has fallen steadily in the past 11 years: It dipped from 13,060 miles in the first half of 2005 to 11,990 miles in the first half of this year.
Lower mileage allotment “leads to better condition of off-lease vehicles, which can command higher used prices,” Edmunds said in the report.
“Low miles also lead to a greater possibility of CPO-able vehicles, which allows automakers to have a hand in used vehicle profits,” it adds.
With new-vehicle transaction prices climbing, automakers are ramping up incentives. In return, models are rolling over the curb at a pace that multiple analysts who sent their assessments to Auto Remarketing believe to be plateauing.
One of the most relevant observations for used-car managers is what Edmunds.com noticed about new-vehicle leasing activity in July since those vehicles likely will be prime certified pre-owned inventory options in about 24 to 36 months.
After touching on 0 percent financing availability, Edmunds.com executive director of industry analysis Jessica Caldwell said, “We’re also seeing indicators that lease deals were much harder for car shoppers to come by in July as lease penetration dropped to 27.8 percent, the lowest level since May of 2015.
“While some of the softness in leasing can be attributed to seasonal fluctuations and the fact that (General Motors’) lease penetration dropped below 20 percent, lease customers are very price sensitive and may need a bit more of a nudge than they’re currently getting to convince them to close the deal,” Caldwell continued.
Leasing certainly is an option for consumers looking to maintain affordability as new-vehicle transaction prices keep moving higher — a development noticed by both Kelley Blue Book and TrueCar.com.
TrueCar estimated the average transaction price (ATP) for a new light vehicle was $32,518 in July, up 1.3 percent from a year ago. Average incentive spending per unit rose by $159 to $3,225. The ratio of incentive spending to ATP was 9.9 percent, up from 9.6 percent a year ago.
“What is interesting to note is that while overall national retail spending remains strong and consumer confidence is relatively unchanged, we are probably seeing some attempts in incentive spending to boost auto sales beyond its organic demand,” said Oliver Strauss, TrueCar’s chief economist.
The analysts over at Kelley Blue Book estimated average transaction price (ATP) for light vehicles came in even higher in July. They pegged ATP at $34,264 as prices for new vehicles increased by $832 year-over-year and $82 compared to the previous month.
“Low interest rates, longer loan terms and increased leasing are helping consumers afford their monthly payments, which would be upwards of $550 per month on a traditional 60-month term,” Kelley Blue Book analyst Tim Fleming said.
If buyers are entering into a retail contract instead of a lease, it appears they’re not getting 0 percent APR at the clip that OEMs sometimes will go to turn new metal, especially in the summertime.
Caldwell said, “0 percent financing deals were much more common last summer than they are now: 12.9 percent of new car loans in July of 2015 were 0 percent, while only 10.2 percent of loans were 0 percent this July.”
The July slowdown evidently isn’t an anomaly, either.
The July Kerrigan Auto Retail Index — composed of the seven publicly traded dealer groups with operations focused on the U.S. market — rose 18.28 percent in July, significantly outperforming the S&P, which analysts said rose 3.56 percent for the month. However, Kerrigan Advisors explained that industry news was “very mixed” for the month so much of this recent rise was “likely a recovery from being over-sold in the prior month.”
In fact, the KAR Index fell 11 percent in June, and year-to-date it’s now off by 10.34 percent.
In its index report, Kerrigan Advisors also mentioned that to this point Ford became the first major automaker to state that the U.S. auto market’s growth was ending. Kerrigan Advisors added the equity research team at Barclays changed its outlook for the U.S. auto market from “plateau” to “eroding plateau.”
Brian Johnson of Barclays said, “Ford acknowledged for the first time any of the pressures we have been talking about for the past few weeks. There’s a big difference between analysts and writers saying this market is poised to get softer, and hearing it from one of the largest players in that market.”
For dealerships looking for an element to signal a turnaround, Stifel chief economist Lindsey Piegza didn’t exactly offer one. Piegza discussed the latest trends regarding how buyers are going to pay for the vehicles they might secure.
Piegza recapped that personal income rose 0.2 percent in June, slightly less than expected, according to Bloomberg. She continued that compensation rose 0.3 percent in June, thanks to a 0.3 percent rise in the wage and salary component.
Piegza also pointed out disposable income increased 0.2 percent in June. Year-over-year, personal income increased 2.7 percent at the end of the second quarter, down from a 2.9-percent annual pace reported the month prior and even further below a near 4 percent growth rate at the start of the year.
“Bottom line,” Piegza began, “as the latest Q2 GDP report showed, the U.S. consumer was doing the heavy lifting April to June, keeping the domestic economy afloat. In other words, the U.S. consumer appears to be on very solid footing, at least for now.
“The continued deceleration of income growth, however, coupled with an ongoing lack of business investment suggests the consumer may face additional hardship in the second half of the year, potentially restraining spending activity below these more recent rates of consumption,” she continued. “After all, without the business investment and development needed to spur robust job and income growth, the consumer will be hard-pressed to maintain a near 4 percent spending pace heading into the second half of the year.”
So perhaps if potential buyers don’t have as much in their wallets when they’re at the showroom, perhaps a point made by KBB’s Fleming could be a silver lining for the used department.
“As the price gap to late-model used cars increases, more shoppers may turn to the pre-owned market for their next vehicle, which could mark a big departure from the new-car sales growth the industry has seen during the past five years,” he said.
More and more people seem to be questioning the value of car ownership, and millennials and seniors appear to be at the forefront of this trend.
More new vehicles were leased in the first half of 2016 than during the first half of any other year, according to the latest Lease Market Report from Edmunds.com. And lease volume has doubled over the past five years.
The millennial generation has a higher rate of lease penetration than any other generation (34.2 percent), but the strongest growth has come from shoppers over age 75. During the first six months of 2016, more than 32 percent of cars sold to this age group were leased — a growth rate of 74 percent compared to five years ago when lease penetration this group was just 19 percent.
“Millennials and seniors actually have more in common that one might think, since both experienced deep economic recessions during their formative years that helped to shape their worldviews and made them more value-oriented,” Jessica Caldwell, Edmunds’ executive director of industry analysis, said in a news release.
“Both millennials and seniors crave the highest-quality product for the best possible price, and considering these groups are both at a place in their lives where they likely have limited monthly cash flow, leasing can seem like the most viable option,” she said.
Monthly lease payments are 23 percent lower on average than monthly financing payments. The biggest difference between monthly lease and financing payments can be found with compact cars (30 percent), full-size pickup trucks (29 percent) and midsize cars (28 percent).
While the majority of vehicles leased continue to be in the luxury segment, the most significant growth has been seen in large vehicles, with compact trucks (214 percent), large trucks (142 percent) and large crossover SUVs (96 percent) leading the way.
“Whether or not it makes financial sense to lease vs. buy depends on a number of personal factors, but it seems many consumers have resigned themselves to the fact that they’ll always have a monthly car payment,” Caldwell said.
“Younger car buyers in particular are so conditioned to having monthly fees for things like their smartphone and streaming entertainment services that they don’t necessarily expect monthly payments to result in eventual outright ownership.”
For automakers, the shift in consumer behavior necessitates meeting the demand for attractive lease deals while protecting residual values against a flood of used cars hitting the market at once. As such, OEMs have been working to lower the allotted mileage of leased vehicles to ensure they are returned in better condition and allow for a greater certified pre-owned opportunity. The average allotted miles has declined from 13,060 in 2005 to 11,999 today.
OEMs have also pushed leases on vehicles with the most desirable options in an effort to pique the interest of future owners.
“While the continued expansion of the ‘lease culture’ could present a challenge for OEMs and their dealers in the future, they seem to be managing it well so far,” Caldwell said. “We don’t see this trend slowing anytime soon.”
Edmunds’ full Lease Market Report for the first half of 2016 can be accessed here.
As a dealer, you may have found that customers have some interesting notions about leasing. Or maybe you’re in the finance arena and you’ve observed that people are in the dark about how the numbers work.
Enter Scot Hall, who you might say wants to do some auto lease myth busting.
The executive vice president of Swapalease.com, a company that facilitates consumer lease transfers, recently shared with Auto Remarketing a list of six of what he says are common myths about leasing. It’s a list he’s cultivated during his time with Swapalease and going back to his days in automotive retail.
So how does he think such myths develop and perpetuate? Is leasing just inherently complicated?
“I think most people get the idea of leasing, generally speaking,” he said. “From there, it becomes kind of a black box: ‘How did you come up with that monthly payment? I understand the loan is a lot like my mortgage: I’m gonna finance this much, I’m gonna pay this interest, I’m gonna finance it for this long.’
“But leasing is a little bit more sophisticated in how it’s calculated, and I think that’s where a lot of the ignorance in leasing comes from,” Hall continued. “It’s not that people can’t understand it; it’s just that they’ve never been taught it. The monthly payment is almost like — I don’t want to call it a surprise — but it’s something that they’re just not sure how to calculate; therefore, I think a lot of myths are created.”
Myth: I don’t want to lease because I want to own my car.
This is the one Hall says he has encountered most often.
The reality, he said, is that most people who buy will trade in their car before completing the loan term, meaning few people will end up actually “owning” their car.
“I find it kind of humorous,” Hall said. “If you’re buying a car on a 5-, 6, 7-year loan, you’re not at any type of a positive equity standpoint in that car usually until year four or five, depending on the type of vehicle. If you’re so intent on owning a vehicle, you can’t trade it in today because you’re in a negative equity situation. I’m not sure how much somebody’s thought that through.”
Related to this, said Justin Leach, a spokesman for Toyota Financial Services, is the misconception leasing is just like renting a car.
“Not true,” he told Auto Remarketing. “The customer is still financing, still requires certain credit scores to qualify, still requires a contractual obligation for a specified period and it still shows up on credit reports.
“This belief can lead to another myth: ‘If you die before the lease is up, they just take the car back.’ Not true. As with any debt, the estate or co-signor, if there is one, has an obligation to the creditor,” Leach continued.
Myth: Wear and tear will get you at lease end.
Not so fast, Hall said. Many brands are interested in keeping lessees in the family, so to speak. As such, some brands may be more than willing to forgive varying degrees of wear and tear if and when you agree to lease or purchase with them again.
That being said, “Leasing companies don’t expect the car to come back mint.”
BMW, for example, “does a nice job with this,” he said. “They have a tool where if a ding or scratch fits in this circle, it’s not a problem.”
And some companies offer an insurance policy that can be purchased with many leases that protect against excessive wear and tear, Hall pointed out.
Leach echoed Hall’s sentiments about wear and tear, adding that Toyota offers an Excess Wear and Use Protection Plan.
“To further put our customers at ease, near the end of the lease term, we offer a complimentary pre-inspection,” he continued. “An inspector will come to the customer’s home or business and provide a thorough evaluation and let the customer know if there is any damage that could be considered excess wear and use.”
Thomas King, vice president of PIN OEM Operations, Media and Marketing at J.D. Power, agreed that everyday wear and tear is nothing to fear. In the event of more significant damage, he pointed out that you’ll end up paying whether you lease or own.
If you own a vehicle with damage that you want to trade in or sell, you have a choice between repairing that vehicle or selling it as is, King said. You’ll likely get less money with the second option. With leasing, you are simply compelled to fix it or pay for the damages.
“Ultimately damage degrades the value of the vehicle,” King said, “whether you’re giving it back to the leasing company or you try to trade it in or sell it privately. Either way, you’re going to lose value if there’s excess wear and tear.”
Myth: Captive is the better way to finance a lease.
“There’s some truth to this,” Hall was quick to point out. “It’s just not always true. There are plenty of times when the captive financier is a good bet. However, some captives won’t provide full flexibility in lease terms, which can cost a lot of money at the end of the lease.
“When you’re dealing with a captive, they’re not only responsible for the financing, they’re responsible for moving the metal off the lot,” he explained. “In many cases, the captive financing is more attractive. The point we’re trying to make is, it’s not true 100 percent of the time, and always take a look at what Option B might be as well.”
What if you need to get out of your lease midway through?
“There may be a captive finance company out there that is not real lease-transfer friendly.” Hall said. “So if you need to get out of that lease down the road, it can be very problematic or expensive to get out of that lease.
“Let’s say that going through the captive finance company might cost you $300 a month on a lease payment. A national bank leasing company might cost $310 a month. I would argue that if the latter had a very good transfer program, offering the lessee more flexibility, that $360 insurance policy is a heck of an insurance policy to have if you need to get out of that lease early.”
According to King, “Captives are typically the most competitive leases you can get. There are exceptions, of course. It comes down to how aggressive does the financial institution want to be in terms of leasing that vehicle? How much do they think it’s going to be worth, and that’s what’s going to drive the lease payment.”
Myth: The cheapest monthly payment is best for your wallet.
A lower monthly payment certainly is more appealing than a higher one — it’s just not always the best, Hall said.
Often times, asking for the lowest allotment of miles will result in a lower monthly payment. But running over on your miles can end up costing far more than if you structured lease terms with more miles on the front end, which would mean a higher monthly payment.
“Just focusing strictly on the mileage, it doesn’t make sense to shortcut that or you’re going to end up paying in the end,” Hall said.
King pointed out that people need not shy away from leasing just because they think they drive too many miles.
“One of the comments you often hear is, ‘Leasing is interesting, but I drive too many miles to lease,’” he said.
“That’s because folks are thinking about the typical leases they see advertised, somewhere between 10,000 and 15,000 miles,” he continued. “They don’t realize there are options available for high mileages. Sometimes people just focus on the advertised message and don’t necessarily explore the leasing options that are available to them.”
Myth: Pre-owned cars can’t be leased.
This is actually two myths in one: pre-owned cars can be leased — and this isn’t a new phenomenon.
“Pre-owned leasing is something that’s coming full circle,” Hall said. “It used to be not mainstream, but relatively common before the financial collapse. It’s not a new thing.”
Used leasing is becoming more popular, and lending arms such as Ally and Toyota have recently introduced structured used lease programs for customers.
According to Tim Russi, president of auto finance at Ally, more than 68 different vehicle models are eligible for Ally's Pre-Owned SmartLease.
“Ally’s Pre-owned SmartLease is an attractive option for consumers across a broad range of ages, lifestyles and backgrounds who want more flexibility and control over their vehicle experience,” Russi said in emailed comments. “We believe the product has appeal across the customer spectrum, from consumers who want to lease a high-end, luxury vehicle, to others who take a more practical view of transportation and may want to drive a particular car for only a short time.
“As vehicle technology advances more quickly, the ability to lease a used vehicle may also appeal to consumers who are looking to upgrade every few years, similar to the way they upgrade other technology like smart phones,” he continued.
Myth: Subprime candidates aren’t good for leasing.
Hall says there are a handful of companies — mostly regional — that are offering used-car leasing to subprime candidates.
In fact, says Hall, giving subprime candidates a lower monthly payment in a shorter amount of time (two years, for example), would give them a better chance at making the payment and satisfying the term, as opposed to a five- or six-year term that involves refinancing in the middle.
“The problem with subprime financing in general,” he said, “is special financing on the retail side traditionally means somebody puts up a relatively large down payment, pays a high interest rate, isn’t getting a lot for their money, and is going to be paying for quite some time. It’s gonna be a long time before somebody has an equity position in that car and is able to refinance it and really make their monthly payment affordable and more reasonable once they’ve shown they can do it.
“Why would you not want to lease them a vehicle? They still have to qualify at some level of credit, you can still ask for some money down. You can put people on much shorter terms to help them rebuild that credit,” he said. “From both a manufacturer as well of dealer standpoint, you’re gonna get all the general benefits of leasing. You’re gonna see that client more often, you’re going to build loyalty.
“Effectively you’re going to sell that individual twice as many cars in most cases. You’re leasing a vehicle for three years as opposed to financing for six, you’re going to see that customer a whole lot more frequently. They’re going to be more appreciative of what you’ve done for them as opposed to tying them up in long-term, high interest rate financing. I think it’s something people really need to take a look at in the industry and really give it some consideration.”
Of course, there is the potential for a higher default risk with lower credit scores — but that applies equally whether they’re financing or leasing, King pointed out.
King went on to say that just as misinformation spreads by word of mouth, so, too, do positive experiences. As leasing has exploded in popularity, and as more and more people tell their friends and neighbors about favorable deals and good experiences, this should help mitigate some lingering anti-leasing myths.
Cox Automotive chief economist Tom Webb called it “relatively unusual” that off-lease volume and retail sales of certified pre-owned vehicles were nearly identical last year at 2.55 million units.
Webb is thinking off-lease volume this year will swell to about 3.1 million while CPO sales are “not nearly going to grow nearly that much.” He made that comment during his quarterly conference call just days after Autodata Corp. indicated the 678,169 CPO sales in the second quarter represented the best-ever figure.
Webb projected this year’s CPO sales will “probably be in the neighborhood of” 2.7 or 2.8 million units.
“That’s not to diminish the value of the programs,” Webb said about how automakers promote and orchestrate their certified initiatives. “They’re extremely important in helping to protect residual values, creating a separate class of customer.
“The problem that comes here (is), you have the captive finance companies doing a lot of very good work in terms of trying to protect the residual values of their off-lease units coming back through CPO program. But if at the same time, you’re putting out a very aggressive new-vehicle lease deal, you’re competing against your own program,” he continued. “That’s the balancing act they have.”
So what is the industry going to do with perhaps 300,000 vehicles that likely can be certified because they’ve just come off of a lease? OEMs and captives might go back to a strategy that’s been tried but not necessarily successfully — used-vehicle leasing. Ally Financial and Toyota each highlighted programs earlier this year.
“If the programs are run well, it obviously could have a positive impact because certainly what the dealer is willing to pay at wholesale is going to be dependent on their ability to retail it at a certain gross within a certain period of time. An attractive lease product probably helps that position,” Webb said.
“Certainly as the lessor, you run the risk of just moving residual risk from one contract to the next,” he continued. “In terms of used-vehicle leasing, it has been a hard business model to put together in the past. But limiting it to a CPO-type product, I think certainly helps and will be beneficial.
“Again, you have to realize and have to build this into the model that those CPO leased units are going to have a very high return rate, because in this instance, the franchised dealer it will come back to really doesn’t have a lot of appetite for that aged category of vehicles,” Webb went on to say.
Back in April, Ally rolled out what it called SmartLease, a program that is associated with more than 35 models with plans to expand “where there’s a meaningful payment differential” for the consumer,” according to Tim Russi, Ally’s president of auto finance.
“As we looked at that, the answer that came back was, ‘there’s a lack of providers for a used solution,’” Russi told Auto Remarketing back in April.
“We saw it as a good opportunity to satisfy what we think is a consumer preference,” Russi continued. “There’s no reason why used can’t be as big as new — in fact, I would suggest it could actually have a larger penetration than new, just because the pool of financing in used is larger.”
Toyota is ramping up its leasing option in the Toyota Certified Used Vehicle program, too, which was first reported by Automotive News.
In an interview with Auto Remarketing to discuss TCUV’s 20th Anniversary, Bill Fay — the group vice president and general manager of the Toyota division at Toyota Motor Sales, U.S.A. — said TCUV leasing has always been an option, but now they’ve essentially made it easier for dealers to use as a TCUV retail tool.
Toyota also worked with Toyota Financial Services and refined some of the residuals.
“This effort by Toyota is something totally different, and we’ll have to see how it grows,” Webb said.
When discussing used-vehicle leasing in general, Webb added, “I think everyone is going to try it. It will obviously be dependent upon how successful it is and what the adoption rate is.”
Webb also turned into a bit of a statistics professor when elaborating about the potential used-vehicle leasing has when it’s connected to a CPO model.
“Predicting the residual value for a CPO unit should be a lot easier statistically speaking because you have a much smaller percentage,” he said. “You have the history of the vehicles since you know what it’s done in the market up until that point. It is going to be much smaller and much more predictable, which from the lessor standpoint is a good thing.
“But it really makes it less enticing for the lessee. It’s the old saying you lease things that depreciate. You buy things that appreciate,” Webb went on to say.
So as a result, the industry is back to the “balancing act” Webb previously mentioned.
“In terms of the OEMs, obviously their biggest exposure is in their off-lease portfolios. Their repo volumes are relatively low since they deal in prime credit,” Webb said.
“In terms of that off-lease portfolio, there are several things you can do, a strong remarketing practice, a CPO program, all of those things help,” he continued. “But at the same time, more importantly, you can’t be competing against yourself in terms of those off-lease units in trying to initiate a new lease with an extremely low monthly payment with no money down to people with less than stellar credit because they’re going to flock to the new units.
“They have a lot of levers under their own control but to a certain extent they're in cross purposes with each other because you want new-lease originations but you also want to support the residual values of your off-lease units that you have to remarket,” Webb went on to say.
Senior editor Joe Overby contributed to this report.
General Motors Financial rolled out its North American vehicle lease program during the second half of 2014 and became the exclusive provider for the parent automaker — assuming captive finance company status — early last year. As a result of those moves, GM Financial determined that leases now make up the largest portion of its earning assets composition, sitting at 38 percent and 9 percent higher than its retail installment contract segment.
So is GM leveraging its captive too much to move new metal via leases? GM Financial chief financial officer Chris Choate addressed that point and more about the OEM’s leasing activity during a special presentation last week.
“I think, and I believe GM would tell you, that leasing has probably gotten to be a higher percentage of their overall sales mix than they would like to see sustained over time. It tends to be a slightly more expensive product for the manufacturer to support in the market,” Choate said in response to the last question posed by Wall Street watchers during a presentation titled “Behind the Charts.”
Choate quickly continued by saying, “Now that comment relates to, that’s a very GM specific comment. Certainly luxury makers are always going to have very high penetration of leasing.”
Experian Automotive revealed through a study released during the National Automobile Dealers Association Convention & Expo back in April that leasing as a financing option for new vehicles has grown 76 percent since the company began publicly tracking the data in 2008.
Additionally, the study determined the upward trend of leasing has resulted in a rising surplus of vehicles coming off lease. In fact, according to the analysis, more than 1.8 million vehicles will come off lease by the end of 2016, looking at projections for April through December.
“With such a large volume of vehicles coming back into the market, consumers, dealers and lenders will want to better understand the options available to them so they are able to take action,” said Melinda Zabritski, senior director of automotive finance for Experian.
Choate emphasized that GM Financial and the parent automaker have plans in place not only to handle off-lease volume but also establish residual values that do not place undue risk on the finance company.
“GM’s actions to predict residual values include, and this has been much discussed over the last several months and quarters, the managing of fleet sales, actively managing new vehicle inventory and maintaining disciplined incentive spending. All of those have a downstream impact on residual values that GMF has to wrestle with as vehicles come off-lease,” Choate said during his prepared presentation.
“GMF has developed a robust end-of-term remarketing process,” he continued, referencing endeavors such as its private label online wholesale marketplace at GMFDealerSource.com. “It’s designed to support the GM dealer base while also maximizing resale values. The more vehicles that we can dispose higher up the food chain to GM dealers either at a local, regional or even national level, keeps those vehicles out of the wholesale auction markets where they will bring less value and, therefore, have a detrimental effect on residual value.”
Choate also touched on the relationship between the captive and the OEM regarding residual values.
“Almost for all leases we do receive some type of lease residual enhancement where GM increases the contracted residual value above the ALG value at origination,” he said. “This subvention payment is based on the difference between those two values.
“ALG, as many of you probably know, is a recognized industry leader in setting residual values which incorporate macro, industry and brand factors. And again that residual enhancement payment results in lower lease depreciation over the life of the loan,” Choate went on to say.
The information GM Financial receives from ALG is a crucial part of its leasing activity, according to Choate, who added that residual values can be adjusted depending on how the wholesale market behaves and how many leases are written.
Industry wide, Experian said franchised dealers finalized 31.11 percent of all new-vehicle transactions during the first quarter as leases.
“We feel very confident at this point that the residual experts are properly bringing into account the supply and the used vehicle values and the gas prices and all the other things that will have a downward impact on residuals over the next three years or so,” Choate said. “So we don’t feel like we've created any extreme amount of exposure for the business. Certainly it’s very cyclical and it’s over time residuals have problems and there’s usually some impairments taken but at this point we don’t really see that that's going to occur over the near-term.
“We can moderate our depreciation rate to slow the depreciation on vehicles that are performing — that are called out by ALG as performing better in the wholesale markets — which is something we're seeing this calendar year relative to trucks and SUVs, for example,” he continued. “We have moderated our depreciation rates a bit on those in order to, again, the goal is to have things kind of come down to what they are really going to be worth at the end of the lease term.”
View of floor plan business
An investment analyst wondered about how GM Financial’s floor-planning business, especially in light of the possibility of an economic downturn and how that portfolio segment helps maintain the relationship between the automaker and the franchised dealer community.
GM Financial indicated that its wholesale dealer penetration level has been on an upward track, sitting at 6.3 percent at the end of the first quarter of 2013 and rising to 10.1 percent a year later. After the first quarter of this year, the penetration level came in at 13.5 percent.
Without mentioning the company by name, GM Financial is competing for floor-plan business that many GM dealers already have with Ally Financial.
“The returns in this business are abnormally low right now because of pricing competition really from everyone. We obviously are dealing with a large legacy provider of floorplan in this product channel, as well,” Choate said.
“We are actively looking to grow the business. We are attempting to stay as price disciplined as possible so that we stay right side up and generate profits from the business. We are OK with where we are now as far as having scale and size and ability to capitalize if and when the next downturn comes,” he continued.
Choate added that he agreed with the inquiry GM Financial needs to absorb the demand if another institution opts to reduce its floor-planning offerings.
“Absolutely agree with your last premise that there may need to be a bit more of a catalyst for us to increase our penetration from kind of the mid-teens upward to 20 percent or even north of that over time. And that may be the economic cycle that we have to see to have that happen,” he said.
Unless you’ve been living under a 2-ton truck, you likely haven’t missed the news that leasing hit a high during the first quarter this year, surpassing 30 percent of all new-vehicle transactions.
Given that information, you’ve likely thought about what happens as all these off-lease vehicles start returning to the market in droves.
Here at Auto Remarketing, we’ve been thinking a lot about this, too, asking such questions as: “How will this affect used-car pricing?” And even, “Should we panic?”
We recently spoke with Andrew Stuart, president and chief executive officer of TD Auto Finance, to get his take on the matter.
“I’ve been in this business my entire career. I’ve seen a lot of cycles come and go,” Stuart said.
Read: He’s got some insight to lend.
“We’ve had steady increases in the overall new vehicle sales figures across the U.S. from 2010 to 2016, going from 11.6 million cars to 17.8 million is the latest forecast for this year,” he said.
“More importantly, we’ve noticed that from 2010 to 2015 fourth quarter, we’ve seen a 42-percent increase in leasing. As a lender, we’re paying attention to that. I think that as these consumers are utilizing leasing on a more frequent basis across the spectrum (as opposed to just using leasing in the luxury segment, where it’s always been a big factor), we’re going to start seeing some young cars returning to the market in greater numbers.”
Consider that more than 3 million vehicles will reach the end of their lease this year. That number is expected to rise to 3.6 million next year and 4 million in 2018, according to Manheim — levels, Stuart notes, not seen since the early 2000s.
“My view as a lender is that it’s going to do two things. First, it creates an opportunity for financing,” Stuart said.
“Obviously, these cars are going to be sold through dealers and retail channels, so there should be an opportunity there for all of us that are playing in the auto lending space and for dealers as well.”
But the other side of the coin, Stuart said — one that he’s been watching very carefully — is that the influx is going to put downward pressure on prices.
“It’s simple supply and demand,” he said.
While some have referred to the increase in off-lease vehicles as a “glut,” Stuart feels that description is premature.
“My personal view is that we’re not there yet. I think we need to be careful though and keep a close on eye on it. … There has been pent-up demand (for used vehicles),” he said. “But I think we’re kind of getting to that tipping point, where over the last few years we’ve certainly seen the effect of that pent-up demand driving used-car prices.
“Looking at Manheim and NADA (indices), we see that used-car prices have been above-average for sure. But there’s certainly a case to be made that we could be getting to a tipping point.”
As for what that tipping point may be, Stuart hesitated to put a specific number on it.
“My view is that given the fact that we’ve been running below 2 million lease returns for the last several years, we’re seeing this dramatic upturn driven by an increase in leasing percentage. … I think that over the coming years we are going to see pressure on used-car prices,” he said.
“I don’t want to use the word glut or overdramatize it, but I go back to the early 2000s. That was ‘normal’ leading up to the financial crisis. Then over the last several years we’ve had this pent-up demand we’ve been working through, so used cars have been being absorbed very easily in the marketplace.
“I don’t want to give the impression that I’m worried about the market,” he emphasized. “I think we’re at a healthy level.”
Stuart mentioned a trend worth considering: Traditional car ownership is coming under pressure. Car sharing is increasing in popularity, he said. More people in urban environments are looking at the cost of car ownership.
And while the hindrances associated with urban car ownership (parking, insurance, cost of owning vs. actual usage) are not new, the alternatives — driven by technology — to some degree are.
“As we’re able to make car sharing companies actually work for us in our daily lives, that’s when we start seeing people adapting to technology. It used to be that you had to hail a cab in the city. Now you’ve got it right on your mobile phone,” Stuart said.
“You can see it just looking at the manufacturers,” he continued. “Big investments are being made by OEMs to be a part of this.”
If you mapped out the metropolitan areas where leasing is strongest, it would closely resemble the Big Ten and Big East basketball territories from the good ole days.
In terms of lease penetration rates, the Northeast and the Great Lakes area of the Midwest dominated the top of the list in the first quarter, with the Motor City coming in at No. 1.
That’s according to Power Information Network (PIN) data from J.D. Power, which indicated that Detroit led the way with 70 percent lease penetration in Q1.
It was followed by New York (63 percent), Cleveland (55 percent), Miami (50 percent) and Boston (44 percent).
Next up was Pittsburgh (43 percent) and Philadelphia (42 percent), with California South (41 percent), Milwaukee (40 percent) and Columbus, Ohio (37 percent) rounding out the top 10.
Of the 13 markets with lease penetration of at least 30 percent, 11 were in the Northeast or Great Lakes portion of the Midwest, with the outliers being Miami and Southern California.
The complete list provided by J.D. Power, is below:
PIN Market 2015 Q1'2016
Detroit 63% 70%
New York 56% 63%
Cleveland 47% 55%
Miami 48% 50%
Boston 37% 44%
Pittsburgh 35% 43%
Philadelphia 36% 42%
California – South 38% 41%
Milwaukee 32% 40%
Columbus 32% 37%
Indianapolis 33% 37%
Minneapolis 30% 36%
Cincinnati 26% 30%
Denver 24% 28%
Tampa 25% 27%
Nevada 23% 27%
California – North 23% 26%
Chicago 21% 25%
Kansas City 19% 24%
Seattle/Portland 18% 20%
Orlando 18% 19%
Phoenix 15% 18%
Other 14% 17%
Baltimore/Washington 15% 17%
Dallas/Ft. Worth 14% 16%
St. Louis 12% 16%
Charlotte 13% 15%
Houston 11% 13%
Norfolk/Virginia Beach 11% 13%
San Antonio 9% 12%
Atlanta 11% 11%
Tennessee 8% 9%
Oklahoma 5% 6%
As the site tried to pinpoint a potential reason why, Swapalease.com reported on Monday that vehicle lease credit approval dropped by 14 percent on a sequential basis when looking at May’s rate compared to the April reading.
Analysts indicated May registered a 61.1 percent approval rate, representing what they described as a “significant” drop from the approval mark in April of 69.9 percent.
As consumer confidence decreases, Swapalease.com is considering that the trend may be pulling credit approvals down with it.
Consumer confidence weakened slightly in May, dropping to 92.6, down from 94.7 in April, according to The Conference Board. As the year continues, consumer confidence is forecasted to follow a downward trend resulting in potentially lower numbers for lease credit approvals.
While overall lease rates have remained healthy and even at record levels, industry observers have pointed to data that show a peak in the automotive market. This sentiment, combined with data that show fewer jobs added recently, hints at a consumer mindset that could grow weary in the coming months.
“We feel we’re entering a period of the market where sales remain hot for the most part, but outside indicators show the possibility of change on the horizon,” said Scot Hall, executive vice president of Swapalease.com.
“I think we can expect the lease credit approval numbers to remain volatile as the year progresses due to fluctuating consumer confidence,” Hall went on to say.
What do you do when customers arrive at the showroom and want out of a vehicle lease?
Maybe they lost their job and won’t be able to afford the monthly payments. Maybe their current vehicle doesn’t comfortably accommodate their new long-legged love interest while another model currently in inventory might. Maybe they simply no longer need the vehicle.
Or perhaps a worst-case scenario, they don't like the car at all that has your dealership's name and logo on the back.
Whatever the scenario, for customers unfamiliar with how leasing unfolds, they might not understand early termination comes at a price, namely fees and the requirement that customers fork over your remaining monthly payments immediately.
Companies such as Swapalease.com and LeaseTrader.com facilitate what’s known as a lease assumption, whereby one party can take on another’s lease midway through. Listing and transfer fees do apply.
It can be a win for both sides, giving the lease seller a way out without penalty, and the lease buyer a short-term lease (something that can fit a variety of life situations but it is not generally available through standard avenues) — often with no down payment.
There are caveats. Not all finance companies allow lease transfers, and some might keep the original lessee’s name on the contract, meaning that person is liable if the new lessee balks on payments. Customers are advised to study the terms carefully.
Auto Remarketing recently spoke to Scot Hall, executive vice president for operations at Swapalease, to learn more about lease transfers and to get his take on what has been widely reported as a looming excess of off-lease vehicle supply.
Auto Remarketing: There are many reasons why someone might want to exit a lease. What, in your opinion, is the most common?
Hall: We see people come to us that fit into one of two large buckets: lifestyle change or financial issue. It could be as simple as a young couple with a two-seater convertible, and they find out they have a baby on the way. Maybe someone loses a job or is downsized. Maybe they’ve got themselves a little bit overextended. … I think it would really depend on the situation.
AR: What could be a pitfall for someone assuming a lease? What do people need to understand?
Hall: You could have a tremendous amount of negative equity, making it not a viable economic option. It typically does require pretty good credit, or above-average credit, which not everyone has, unfortunately. Outside of that, people would want to protect themselves in terms of the actual vehicle that they’re taking over. You would not want to take over a vehicle (I’m going to exaggerate a lot) that’s missing a door. Whatever damage or over-mileage become the responsibility of the person taking over that lease. At Swapalease, we have different services available to help protect people themselves from that. And overall, we don’t see a lot of problems; most of our cars are a year or two old.
AR: What type of cars and trucks would make-up the short-term lease universe?
Hall: German and Japanese luxury cars, because they are leased more. These aren’t exact numbers, but of every 10 Chevys sold, two are leased. BMW, that number is six or seven.
AR: How many lease transfers has Swapalease facilitated?
Hall: Swapalease has done tens of thousands of lease transfers — about 1,000 transfers on a monthly basis.
AR: We’re already seeing a lot of off-lease supply, with increases on the horizon. Is this cause for alarm?
Hall: I think it’s not the issue some people are making it out to be. We’re still playing some catchup in terms of used-car demand, what’s left over from the recession and restocking lots, even going all the way back to Cash for Clunkers. That really kind of changed the dynamics of programs. Moving forward, it’s something that both captive finance companies as well as your banks that do leasing will need to address. Legally, the best way to address that is by offering offer more and more attractive finance options.
AR: Is there a tipping point?
Hall: What amount of leasing is sustainable? It’s really hard to say in terms in percentages. Right now, we’re looking at about 30 percent lease penetration overall. … I think there’s quite a bit more room now. We are becoming a society of people who don’t necessarily need to own things. … You’re paying for what you use. Also, you’re staying up on top of the latest technology. Think of car leasing as phone buying: new, new, new every so often. More and more people are looking at the idea of the idea of leasing, and there will be some challenges associated with that.
