The other day we were reading an opinion from an auto pundit on the length of auto loans, and were taken aback by the naivete of several statements. It seems that some folks in the competitive atmosphere that is the auto business prefer to have a brief and narrow focus.
If you are in the auto business at some point the thought of how long will these low interest long term loans keep on going, and how much deficiency can we roll over on many deals; must have surely crossed your mind.
Almost 6 years ago, agreed its an eternity in this business we wrote "Wash Out" our white paper on washing out of trades, leasing, and residual values. Those were the days when the Canadian dollar was finally climbing out of the basement, and suddenly prices of vehicles in Canada were high.
If you remember leasing at the time was extremely popular in Canada with a penetration of over 40%, obvious that lowering prices would impact and heighten the residual risk carried by the various manufacturers. Manufacturers were concerned, dealers were muzzled, consumers were incensed.
About a year later a couple of manufacturers were tethering on the brink of disaster, were bailed out, and what a great excuse for a lot of manufacturers to get out of leasing, and further shift the value risk to the customer.
It was a brilliant move, lets lengthen the terms of the loans (to make vehicles affordable) and lets shift the value risk to the customer. At the outset it was simple enough, lets go from 60 to 72 months, lets go from 72 to 84 months (to compensate for the what would have been a value risk to now a deficiency). Finally lets step on the gas and go from 84 to 96 months to try and get every deal with any and every deficiency.
Its a successful formula...vehicle sales are on the rise. At the same time lets go from 96 to 108 does not make sense, everyone knows that the ceiling is at 96, and 0 percent...which was reached some time ago.
During the turmoil in the market, some manufacturers elected to continue leasing and assume the residual risk, remarket the lease returns, strengthen their nascent CPO efforts of the time, and literally continue to have an excellent flow of used vehicles. While making money twice on most vehicles, which remains an appealing aspect of leasing.
We all know that financial services are an intrinsic part of "moving iron", and balancing the risk is the fine art of the financial services offered...a few months ago we published Money for the Deal depicting the fine art and evolution of financial services.
What is the current reality?
Manufacturers offer finance terms up to 96 months at 0 percent interest simply to be in a position to actually do business, since the customer in many instances is in a deficiency position with the trade in. At this point its become a vicious circle. The customer know that he is deficient and seeks out the best terms and monthy payments to actually do a deal. The lenght of the term is somewhat irrelevant, its the monthly payment that is important.
If you actually believe that the terms are longer, because vehicles are more reliable...its your choice!
The manufacturers that continued to lease during the turmoil, and continued to assume the residual risk are in a different position and ensured a better flow of repeat business and loyalty.
In most instances the customer will trade one vehicle for another for a comparable monthly payment that fits in the budget. Obvious that the customer assumes the value risk of the vehicle, while the manufacturers assist the customer in rolling over the risk from one vehicle to another.
Why is leasing emerging again, its the plan B to compensate for the limit of the 96 month terms.
Its how much for the trade, and how will you shift the risk to the next vehicle, and stay within my budget.