Why leasing makes sense for dealers

Let’s take a closer look at the bottom line return from leasing vs. financing.

According to industry figures, lease penetration nationwide has dropped from 35 per cent down to 20 per cent, the lowest level in the history of leasing.

Leasing has also not been as strong as it has been in the past, mainly because of how the current interest rates are affecting the ability of consumers to get adequate financing.

While these are all contributing factors, one of the biggest reasons for declining lease penetration is that many dealer principals/general managers have made a conscious policy decision not to offer leasing to all customers, unless the customer asks for it. 

These dealerships have stated that they would rather the customer finance their vehicle for 84/96 months and reap the large F&I reserves and stronger F&I gross profit. 

Hence, allow me to deal with the elephant in the room. Dealerships do make more money in F&I on finance deals versus lease deals. True. However, it may only be once, and in the end, leasing will win the total gross profit race. Think Tortoise versus the Hare.

A dealership (depending on franchise) may make $3,000+ F&I gross profit on a finance deal and only $1,800 F&I gross profit on a lease deal (40 per cent less).

However, we make the assumption that when the finance customer returns in 5 years to buy another new vehicle, the dealership will make another $3,000 gross profit in F&I.  This is most often not the case. 

Although the Financial Services Manager may have the ability to sell this much, they can’t. They are most often dealing with negative equity on the trade-in and the total finance amount is capped on the new vehicle by the dealer plan lender (there is simply no room for the F&I products). 

Hence, it is more likely that we will keep a lease customer for more vehicle transactions.

Furthermore, because the customer is rolling negative equity into the next, new vehicle, they simply can’t afford the payment increase that goes along with a fully (F&I) protected payment.

Moreover, leasing compresses trade cycles. A customer financing a vehicle for 96 months may be able to trade at 6 years. However, a customer leasing for 60 months can most often trade at 4 years and be at (or near) an equity position.

We also need to factor in that the dealership is more likely to retain a lease customer for 5 vehicle transactions versus a finance customer’s 4 transactions.

Dealerships tend to more carefully track and manage their lease portfolios versus their finance portfolios. Hence, it is more likely that we will keep a lease customer for more vehicle transactions.

Further, what is your win ratio of lease maturities versus finance trade-ins?

Because the trade-in value of a lease is established at inception, is it possible that your dealership’s win rate is higher?

Is it possible that you simply get to appraise more lease maturities ( per cent) because lease customers are tied to your dealership (or feel they are)? And because a strong lease penetration creates a future used vehicle inventory, is it possible that lease maturities may have lower overall acquisition costs versus buying used vehicle inventory at auctions and from wholesalers? 

Is it possible that your dealership makes more gross profit on lease maturities sold as used vehicles in your Pre-Owned Vehicle Sales Department (1 lessee/owner, credible vehicle history, etc.)? 

Some dealerships argue that they make more money on finance customers versus lease customers in the Service Department. This could be true, however, it is not necessarily a fact. What percentage of your finance customers versus your lease customers defect once the manufacturer’s warranty has lapsed? 

Do you consistently offer OEM extended warranty programs to lease customers that have leases beyond the manufacturer’s comprehensive warranty (e.g.: 60-month / 120,000 kms lease)? Do you offer lease customers OEM maintenance programs? Do you offer lease customers winter tires and tire storage? Do you offer lease customers accessories such as ski/bike racks, running boards, etc.? Do you offer lease customers quarterly or semi-annual detailing packages?

The decline in lease penetration can also be attributed to the fact that many dealerships simply do not present a lease option to all customers (showroom and online) and many sales consultants either lack a fundamental understanding of leasing or shy away from it if the lease rate is a ½ point higher than the finance rate.

However, even when the lease rate is slightly higher than the finance rate, can we not sell this to the customer? Since 2020, we have been immersed in a turbulent used vehicle market with unpredictable and unimaginable swings in pricing (think used EVs). Could it not be comfort to many customers that (if they lease), their trade-in value will be guaranteed, like a G.I.C. – with no worries about the ups and downs of the market and the economy? 

What percentage of your finance customers versus your lease customers defect once the manufacturer’s warranty has lapsed?

Could it not be comforting to many lease customers that if their vehicle is totaled in an accident, that the negative equity (balance owing on the lease agreement versus insurance company financial settlement), will be covered by the OEM’s GAP coverage? 

Could it not be comfort to many lease customers that if their vehicle is in an accident (and repaired by an authorized collision centre), the accident will not impact and lower the Residual Value of their vehicle (it would most certainly if they financed the vehicle).  Is all of this additional security and peace of mind not worth an additional ½ point or full point of interest?

About Chris Schulthies

Chris Schulthies is the president of Toronto-based Wye Management. Wye Management provides sales and management training (showroom and digital) for dealerships, dealer groups, OEMs and industry suppliers in Canada and the U.S. You can contact him at cschulthies@wyemanagement.com or 416.908.6346.

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