Could leasing help car dealers mitigate looming equity risk?

While there is no reset button, there may be a silver lining — and it might just be leasing. Properly structured short-term leases have many benefits for consumers, manufacturers, lenders and dealers.

While rolling a negative equity into a lease does not unbury a customer, it does solve their problem over a much shorter period of time and gives them the ability to start with a clean slate at the end of their lease. Countless studies have shown consumers appreciate transparency and brutal honesty. The “you’re not going to be unburied; but, you will have a shiny new car with a warranty and you’re only stuck in it for three years” pitch, surprisingly, is often well received by consumers.

There are tremendous benefits to leasing for manufacturers as well. With the average loan length exceeding 72 months, manufacturers have a shot at delivering three vehicles over that time span as opposed to one. An additional benefit is consumers who lease vehicles tend to have more brand loyalty than those who buy.

Lenders also stand to benefit from leasing. Much like the manufacturers, the shorter terms for leasing create opportunities for additional transactions versus long-term loans. Leasing, however, is not without risk. Residual value risk is one of the most important elements that must be addressed. This creates an opportunity for those lenders who think outside the box. An aggressive, properly structured lease program for off-lease vehicles can mitigate much of this residual risk.

The biggest winners are the dealers. Customers who lease trade vehicles more often and are three times more likely to become repeat customers than those who buy. One of the most overlooked benefits for the dealer is the increased value of their organization to potential acquirers. Many dealerships have received valuations with tremendously high multiples because of their robust lease portfolios.

This concept may seem like a bit of a stretch — after all, leasing accounts for a much lower percentage of all transactions than it did two years ago. This is not the first time we have seen a dramatic decline in lease penetration; leasing all but stopped shortly after Sept. 11, 2001, because of the abundance of 0 percent financing options. This same dynamic came into play during the COVID-19 pandemic. Leasing is highly cyclical — it came back in a big way after 9/11 and it is poised for a comeback in the very near future.

In fact, many players in the space are preparing for an uptick in leasing. Several lenders are getting increasingly creative with their lease offerings and with inventory levels slowly coming back, there is a resurgence of manufacturer supported lease programs. Will leasing save the world? Probably not. That being said, it is one viable method for addressing the challenges ahead.

Only time will tell how all of this unfolds. One thing for certain is changes are coming, and those manufacturers, lenders, dealers and technology companies who are investing now to address the needs of future consumers will have a big advantage over those who aren’t.

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