Editor's choice
10 Jul 19

Used-vehicle leasing “too complex” for success

With outright purchase of a new vehicle increasingly out of reach, a growing number of consumers in the US is turning to used cars, or to private leasing. So why not combine both? Used-car leasing may sound like the ideal crossover, but in practice, it’s too complex for success, experts say. 

As shown by Experian’s most recent State of the Automotive Finance Report, there is some growth in the used-car leasing segment in the United States. 

40,000 vehicles
In the first quarter of 2018, used cars represented 4.1% of the overall US vehicle lease market. In Q1 of this year, that figure had crept up to 4.68%. In absolute numbers, that’s an increase from about 36,000 to about 40,000 vehicles. 

According to Experian, lease returns and dealership loaners make up most of the used-vehicle leasing market. The slight volume growth was generated mainly by captive finance companies and credit unions. 

But despite the relative increase, those absolute numbers are still very low. As reported by Automotive News, automotive lenders in the US are reluctant to offer used-car leasing due to the difficulty of predicting the residual value (RV) of a used vehicle in a leasing programme. 

Deal-breaker
According to Jeremy Acevedo, Manager of Industry Analysis at Edmunds, used-vehicle leasing is a good way to solve both supplier issues like inventory management, and consumer ones like affordability. However, the deal-breaker for most potential suppliers is the underwriting challenge: “One element that’s still elusive is thinking about what the depreciation of these vehicles is seven years down the line instead of three,” he told Automotive News.

Rather than offering lease returns for a second time on the lease market, it’s a much more lucrative option for OEMs (and their captive lessors) to offer them for sale as certified pre-owned vehicles, Mr Acevedo said.

Predictable performance
But not everybody agrees. According to Jonathan Smoke, Chief Economist at Cox Automotive, the depreciation issue is fairly straightforward: “A used vehicle after its third year has the most predictable price performance that I can observe.” His explanation for the lack of success for used-car leasing: subscriptions. 

Suppliers of vehicle subscription services have a greater degree of control over how a vehicle is being used in relation to its depreciation rate if they’re not locked in to a fixed-term contract, Mr Smoke suggests. When a subscription vehicle reaches the optimal selling age, it’s much easier for a supplier to withdraw it from circulation. 

However, the success of subscriptions is harder to measure, as they are not tracked by credit bureaus: subscriptions do not qualify as personal lending.

 

Image: Highways Agency, CC-BY-2.0

Authored by: Frank Jacobs