Summer barbeque season brings out summer barbeque conversations. I was gathered around the barbeque with friends when the discussion became heated.
The topic? No, it wasn’t the merits of grilling with charcoal versus gas but whether to buy or lease a car. It’s a hotter topic today than ever since we’re looking at an estimated 3.1 million vehicles coming off lease in 2016. Where are these cars going and what is the best way to move the vehicles while holding residuals and profits?
To determine which option is best, buy or lease, let’s look at both, and to make things even more interesting, let’s see how certified pre-owned (CPO) factors into the equation.
Lessees act more like used-car buyers than new
First, the perception: Many consumers assume that leasing is for new cars only. What they overlook is that leasing is simply an alternative way of financing a vehicle. Leasing a used vehicle works exactly the same as with a new car; the biggest difference is that the monthly payments will likely be less. Cox Automotive research shows that once they go to the dealership, lessees act more like used buyers than new, focused more on the deal than the vehicle.
For the dealership, the challenge is getting approval for a used-car lease. Since 2008, writing leases on pre-owned vehicles has become tight from lenders. A dealer is more likely to get funded through a captive lender and on a certified pre-owned vehicle.
Used-car leases follow the same basic structure as new-car leases. The lender writing the lease will determine the vehicle’s residual value, and the lease payments will be determined by the difference between the vehicle’s sale price and its residual value. Then, the lender will assign a money factor to the deal, just as they would on a new-car lease.
Since interest rates are typically higher for a used car than a new, the same applies for a lease — the money factor will be higher for a used-car lease than for a new-car lease. The biggest part of the lease payment is attributed to depreciation cost. Even so, the lower sales price on a used car combined with the higher money factor and the lower rate of depreciation will typically equate to a lower overall lease payment.
Keith McKinzie, owner and general manager of Sonju Superstore in Two Harbor, Minn., said, “The public likes the word ‘certified.’ It’s a sweet spot in the business. The sweet spot today for a CPO lease is that car coming in off lease. Look at how much that vehicle has depreciated over the first two years of its life and how little it’ll cost to drive it for the next two years and you have the winning formula for both the customer and the dealer.”
Another advantage to the consumer is they have a hassle-free return at the end of the contract; the same as on a new car lease.
Enabling consumers to get more car for their money is an additional benefit to them. A lease option on a CPO can put consumers into the vehicles they desire — bridging the gap between new and used — and builds brand loyalty to both make/model and your dealership. A huge advantage to dealers is that the lease enables you to know exactly where the consumer is in the buying cycle.
You can data mine these consumers at regular intervals to keep them in your sales pipeline and flip them to a new or another CPO at the end of the lease contract.
Today’s buying population is heavily weighted with millennials. Generally, the millennial is price conscious and at the same time wants a vehicle that fits their personality and their lifestyle. The majority prefers a new car but can’t afford it, so a CPO is the vehicle of choice.
CPO leasing provides dealers long-term benefits
The dealer benefits of CPO leasing are many and long-term. Cox Automotive analysis, based on Experian data , shows that loyalty among customers is higher for CPO than non-CPO and leasing benefits from higher consumer loyalty than retail.
In addition to brand loyalty, your dealership’s service center will also benefit from the increased loyalty of the consumer. The 2016 Cox Automotive Dealer Service Study indicates that service retention of customers who purchase either a new or used vehicle is lower than lease customers.
The study found that 60 percent of new purchasers and 56 percent of used purchasers had not returned to the originating dealership for service in the last 12 months.
Conversely, 63 percent of those customers who leased a vehicle had returned to the originating dealer for service in the last 12 months.
Other benefits to the dealership are a shorter customer sales cycle, the ability to increase back-end with insignificance to monthly payment, and increased off-lease volume. All these factors can equate to more profitable used car sales.
CPO leasing unlocks new options
In life, the more options you have, the greater your chance of success. This applies to sales as well. Being able to offer a consumer a new-car sale, a new-car lease, a used-car sale and a used-car lease gives you more options, more chances of successfully closing the deal and winning a customer for life.
By certifying the vehicle, you are increasing your ability to finance it (traditionally or leasing), as well as improving brand and dealership loyalty. Leasing a CPO also helps you overcome the objection of making repairs to a vehicle the consumer doesn’t own since it is backed by a warranty.
Andy Walker, used-car manager at Avondale Toyota, said, “Leasing a CPO gives the consumer another option to get what they want. Ownership isn’t as important to people today as having options on getting the next big thing. People are even leasing cell phones to save money and keep their options open. Now, maybe the customer wasn’t quite a new car customer yet, but we can get them into a CPO lease and migrate them into a new car later. Even better, the retention factor is high because we also have the option to put them into another CPO.”
Another factor to keep an eye on is that with the high number of new-car lease returns expected this year, we run the risk of a decrease in residuals. I would expect to see the OEMs step up incentives on CPO vehicles, which will make lease payments on used even more attractive.
So as you’re having your summer barbeque conversations and the topic of buy or lease comes up, or when you’re in front of your next customer who can’t get financing for the new car they came in for, remember that CPO leasing offers dealers and consumers the best of all worlds.
Rob Christman is the fixed operations director of sales at Cox Automotive.