Could leasing help car dealers mitigate looming equity risk?

There’s no reset button, but you might see a ray of hope. A well-structured short-term lease offers many benefits to consumers, manufacturers, lessors and dealers.

Incorporating negative equity into a lease doesn’t solve the customer burial, but it solves the problem much faster and allows you to start with a clean slate at the end of the lease. Countless studies show that consumers appreciate transparency and brutal honesty. “You won’t get buried, but you’ll get a shiny new car with a warranty that will only last 3 years,” is surprisingly well received by consumers.

Leasing also has significant benefits for manufacturers. Since the average term of the loan is over 72 months for him, it is possible that the manufacturer will deliver three of his vehicles instead of one in that period. As an added benefit, consumers who lease vehicles tend to be more loyal to the brand than those who buy.

The lessor is also in a position to profit from the lease. Much like manufacturers, shorter lease terms create additional trading opportunities than long-term loans. However, leasing is not without risk. Residual value risk is one of the most important factors that must be addressed. This creates an opportunity for lenders who think outside the box. An aggressive and well-structured leasing program for off-lease vehicles can mitigate much of this residual risk.

The biggest winner is the dealer. A customer who leases a trade vehicle is used more often than a customer who buys, and he is three times more likely to become a repeat customer. One of his most overlooked benefits for dealers is the increased value of the organization to potential acquirers. Many dealers are rated at very high multiples due to their strong leasing portfolios.

This concept may seem a little exaggerated. After all, leasing is a much lower percentage of all transactions than it was two years ago. This is not the first time that leasing penetration has dropped dramatically. The lease he nearly stopped shortly after September 11, 2001. This was due to the abundance of 0% funding options. This same dynamic has emerged during the COVID-19 pandemic. Leases are very cyclical. It made a huge comeback after 9/11 and is poised to make a comeback in the near future.

In fact, many players in this space are preparing for an increase in leasing. Some lenders have become increasingly creative with their leasing offerings, and as inventory levels slowly return, manufacturer-supported leasing programs are making a comeback. Probably not. That said, it’s one viable way to address future challenges.

Only time will tell how this all plays out. One thing is certain: change is coming. Manufacturers, lenders, dealers and technology companies that invest today to meet future consumer needs will have a significant advantage over those who do not.