As the popularity of auto leasing continues to grow it’s hard to argue against any reason for not offering a lease program to members. As leasing continues to close the gap on traditional loans, in some regions of the U.S. it can account for over 70 percent of all new cars and trucks sold. These statistics are hard to ignore as credit unions look to compete as a full service auto lender versus banks and captives. Providing a lease option for members opens the door to increased auto loan growth, and depending on the location, that growth potential can be very significant.
Leasing is the most efficient auto-lending product in the industry with credit scores averaging above 750, coupled with 65 percent approve-to-fund ratios, this is a great opportunity as interest continues to climb. In 2015 leasing accounted for 4 million of the 17.5 million new vehicles sold in the U.S. This is unprecedented. Based on demographics for the average lease customer, this number will only continue to rise in the years ahead. Ignoring this revenue stream can cost a credit union anywhere from 30 to 70 percent of the new car buying market.
Nearly a quarter of the new car market obtained vehicles through leasing in 2015, as expected this number climbed to 31 percent in just the first half of 2016 according to Experian Automotive. Luxury brands such as BMW reported in 2015 that 60 percent of new car deliveries were leases, as were 54 percent of Mercedes-Benz’s, according to J.D. Power and Associates. While high-end vehicles benefited from leasing, the economy models had an excellent showing last year. Honda reported 32 percent of new car sales nationwide were a result of consumers’ purchases through leasing. In the New York region that number was higher, at 67 percent based on dealer feedback.
Leasing is an easy fit for the car buying population, as everyone wants a lower monthly payment and leasing delivers on this. Credit union members need to have this option represented at the dealership. The profile of the average lease customer is a young American under the age of 35, the Millennial. They are leaving the big cities and auto-sharing options for the suburbs along with a traditional lifestyle they had opted to put off. However, it has found them, starting families, buying homes and cars are quickly becoming a part of their lifestyle. The youngest Millennial is estimated to be around the age of 19, so peak buying potential for this group is decades away.
Establishing a lease program will also put your credit union on the path of establishing a relationship with this population segment an important growth marker for the future of credit unions. As we witness one of the longest periods of new-car sales on record, Millennials are leaders in leasing at a rate higher than any other age group.
Leasing is influencing auto-buying throughout the nation, as numbers surpass the 31 percent mark as a national average, there are some regions where this number has climbed to 70 percent. For instance in South Florida, Los Angeles, San Francisco, New York and northern New Jersey, the number is double the national average. One of the biggest advantages auto leasing offers credit unions is less competition. A typical dealership has between 5 and 15 conventional retail financial options including credit union financing. Credit union leasing is frequently the only competition other than the captive auto lender. Credit unions are in an excellent position to take advantage of this business model.
One of the hurdles credit unions have wrestled with, when choosing a lease partner is the risk associated with estimating residual values on vehicles and managing the program. The risk enters the picture when estimating the vehicle’s worth upfront, for its actual value at lease-end. While this can be a guessing game, it’s important to vet out any company a credit union will eventually partner with. Longevity is a key component to look for in a potential partner. Experts in the field understand the history of leasing. They can, and do, avoid the pitfall of market fluctuations and have a system in place to mitigate the risks.
A leasing program is a very important next step for a credit to take when strategizing growth plans for 2017. Dust off your vetting process and start looking at partners that can get your credit union to the next levels: portfolio and membership growth.
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