By Rob Volatile, Regional Vice President of Easycare Sales, APCO Holdings

Last December my lease ended and for the first time ever my vehicle was worth more than the residual. In this environment, I could not bring myself to ask one of my many dealer friends to sell me a new car at invoice. But I wasn’t about to leave $15,000 on the table. For the first time ever, I bought out the lease and kept the car.

My situation illustrates a specific win-win opportunity for both dealers and consumers in the next year or two. It’s time to dust off your old lease-training manual “Half a Car” and get a little more aggressive with leasing—both new and used vehicles. Dealers that move in this direction now will be able to protect their newfound front-end grosses for a longer period of time. Here’s how:

Win for the Customer

We all know the base lease concept is:

• Cheaper payment
• Better terms
• Higher and guaranteed residual value

For consumers, the guaranteed residual value is the perfect hedge against a market in flux. Regardless of when the chip crisis is solved, we do not know if the pre-owned market is going to tank or remain inflated.

The best position for consumers is a two- or three-year lease. If the market tanks, the customer walks away at the end of the lease with no harm. If the market is still inflated, the customer buys out the lease and has an asset and flexibility in his or her next move.

In addition, most consumers are payment shoppers. In an inflated market, who cares what the price of the car is if you’re leasing? When a customer leases, they typically get to drive a nicer vehicle than if they were to purchase based on the payment.

Finally, lenders are more than likely going to inflate residual values based on pre-owned market values right now. The result for consumers will be attractive payments on more expensive vehicles.

Win for the Dealer

We can’t predict when but at some point, dealers will have inventories close to pre-crisis levels. At some point, a dealer (you know the one) will be advertising and selling vehicles at invoice again, forcing the local market to shift to compete. But as I’ve mentioned, customers that choose leasing ultimately care about the payment and mileage. The more customers are payment motivated, the more potential profit dealers can realize through leasing.

Another benefit for dealers is shorter trade cycles. When leasing, customers turn in their vehicles every two to three years. People who purchase new vehicles own them for an average of 8.4 years, according to Shorter trade cycles are better for dealers.

Whether or not a consumer decides to buy out their lease or trade it in, it’s a win for dealers. If the customers exercise the buy-out option the dealership has the opportunity to finance the vehicle and most consumers will purchase a vehicle service contract (VSC) because the vehicle is out of warranty. If the consumer trades their vehicle in, the dealer acquires a quality used vehicle to sell and moves more metal.

Additionally, many products in F&I are applicable to leasing. If the desk understands how to properly pencil a deal, there is nothing stopping F&I from protecting their PVR on a lease. It really comes down to executing a plan that involves the desk and F&I and how the deals are structured and explained to the customer. In reality, a lease is nothing more than a short-term finance deal.

Finally, if a dealer chooses to get aggressive about leasing in response to inventory levels normalizing, fixed ops will be a big winner. When a maintenance package is given with a lease, selling dealers average close to a 90 percent retention rate in the first two years. That means every recall to every minor maintenance issue is available for fixed ops to capture.

As more customers are open to leasing used vehicles, a maintenance package is even more critical to capture their service business. The cost of giving a PPM away is cheap compared to the cost of losing that customer’s long-term business to independent or aftermarket service centers.

Leasing is a win-win strategy that protects the customer from market uncertainty while protecting front-end gross for dealers. The more leases you write now, the better off you’ll be when the market returns to normal and beyond.

About the Author

Rob Volatile is Regional Vice President of EasyCare Sales with APCO Holdings LLC. He has been a national trainer and worked with hundreds of dealers to optimize profits. Previously, Rob was the founder and owner of Northeast Dealer Service and Strategic Diversified, serving the mid-Atlantic region for over 20 years. In 2021 the company merged with APCO Holdings, LLC.

Author: Christine Corkran

Digital Dealer