The auto industry is changing – again. If you’re like me, you probably feel whiplash from all the changes that have affected the automotive industry in the last few years. From pandemic shutdowns and parts shortages to sky-high interest rates, automotive lenders have faced the challenge of auto loan portfolios continuously testing the boundaries of risk mitigation.
The Wall Street Journal recently reported that the costs related to car ownership continue to outpace the consumer price index. Aside from insurance, gas, parking, and maintenance, the auto loan itself has reached epic proportion. According to the latest State of the Automotive Finance Market report from Experian, the average amount financed on a new vehicle for 2023 was $40,366 with an average monthly loan payment of $738 with loan terms up to 85+ months.
These costs alone are not sustainable for consumers or lenders. According to Credit Union Leasing of America, over-extension is one of the primary concerns for credit unions in the 2023 auto-finance landscape.
However, as I said at the beginning, there is an interesting change afoot – used-car leasing.
Honda made headlines earlier this year with the announcement of an initiative to lease CPO vehicles up to five years old. While leasing has traditionally been an option for high-end new cars, it is finally making a move across all market and risk tiers.
Rusty West, CEO of the automotive data services firm MarketScan told Wards Auto, “There’s a huge opportunity coming for lending institutions to get in the used leasing business.”
Mark Chandler, Vice President of Business Development for Credit Union Leasing of America agrees, telling Wards Auto that used-vehicle leasing is his proposed solution for reducing lending risks. “It checks all the boxes. For lenders, it’s low-risk, good-yield and short-term. For consumers, it really comes down to affordability.”
Outside of industry insiders, Experian reported leasing gains across all credit tiers.
As consumers continue to see rising vehicle prices and high interest loan rates, they need options. A lease can mitigate some of the cost of financing a vehicle, as well as some of the default risk for lenders.
Understanding lease demographics
There are numerous reasons why a consumer would consider leasing versus buying a vehicle. Understanding these details not only enhances your portfolio, but also strengthens your relationships with dealerships. Consider these scenarios and how a lease might meet everyone’s needs.
- Considering an EV – but not quite sure
- If the customer is considering an EV, offering to lease a used EV provides an affordable option. While several used EVs qualify for a revamped federal tax credit up to $4,000, many consumers aren’t ready to flip the switch. Leasing a used EV let’s the buyer ‘test drive’ the EV concept, while staying engaged with the customer.
- Working from home – but still need a vehicle
- If the pandemic taught us anything, it’s that the U.S. workforce can be productive working at home. A McKinsey study revealed that 87% of employees said they would be more productive if they could work their desired number of days at home. While commute time and miles on the road have decreased since the pandemic, consumers still prefer to have access to a vehicle. Leasing a used vehicle can be a budget-friendly solution, especially if two cars are needed for a busy household.
- Young drivers – at home or away
- According to the Brookings Institute, fewer young adults in the U.S. have access to a car in their household than they did in 1980, and they are driving fewer miles than they did in the 1990s. The primary reason is economics. Whether still in high school, away at college, or just starting their adult life, leasing a used vehicle might be the best, most affordable option.
While the leasing market has been around since 1941, many consumers are either unaware or unfamiliar with the options, and leasing a used vehicle may never have entered their minds. By understanding your consumer demographics – and those of your dealerships – you and your auto lending team can meet an important need for your customers.
Our proven team of EFG experts are here to help. We bring years of experience to your team. At EFG Companies, we’re more than an F&I provider, we’re your business partner in the retail automotive industry. Contact us today to learn more about how our team can help you achieve your winning strategy.