Too many used cars? Lease them

“It’s not a 90-day program. It’s part of a long-term strategy for sure.” — Mike Wells, Toyota Financial Services,
on certified leasing

To cope with an industrywide flood of 3.1 million off-lease vehicles returning to the market this year, some captives and other lenders are offering leases on used and certified preowned vehicles.

The number of off-lease vehicles will be up almost 20 percent from 2015, and will continue to grow in 2017 and 2018, auction company Manheim, part of Cox Automotive, forecasts.

Leasing has surged as a share of new-vehicle transactions to 29 percent in the fourth quarter of 2015, from 24 percent two years earlier, according to Experian. The climb was largely driven by captive finance companies seeking to boost sales by keeping customers’ monthly payments low. Leasing has been fairly rare in the used-vehicle market, but its share is growing. In the fourth quarter of 2015, 3.8 percent of leases were on used vehicles, edging up from 3.2 percent two years earlier.

Now Toyota, Ally Financial and BMW are encouraging used and certified leasing to prepare for the glut of lease returns. Infiniti is considering a certified leasing program, a spokesman said, but has nothing to announce yet.

As Toyota Motor Sales U.S.A., Toyota dealers and Toyota Financial Services brainstormed ways to get more customers into the off-lease vehicles, leasing more certified preowned vehicles seemed like the best solution, said Mike Wells, group vice president of sales, marketing and product for Toyota Financial Services.

Certified leasing was available to Toyota, Scion and Lexus dealers before, and when those dealers began tapping it in larger numbers, Toyota Financial Services decided to encourage its use with various incentives, such as discounts on rent charges, which is a finance fee paid to auto lenders, similar to an interest rate on a loan.

In January, Toyota Division and Lexus began rolling out incentives for certified leasing in the Northeast. The national rollout should be completed by the end of this month.

Toyota and Lexus are “rallying around that volume as an opportunity,” Wells said. “This just became one more of those tools that they believe they can use to bring in some of those cars and keep [customers] coming back to us.”

Toyota, Lexus and Scion certified vehicle lease terms will last 36 months on average, similar to a new-vehicle lease. To be eligible for a lease, Toyota and Scion certified vehicles must be no more than 3 model years old with fewer than 65,000 miles on the odometer. Lexus CPO lease vehicles must be no more than 4 model years old with fewer than 60,000 miles.

10 times higher

Certified leasing has been available for years, but Toyota wasn’t allocating its resources to that area, Wells said. Dealers were more interested in selling lease returns as used retail. But as a result of the initiative, certified leasing during the first quarter was 10 times higher than a year earlier, Wells said.

“I think it’s in direct relation to how competitive the programs are, the level of awareness in used-car departments and the additional training that’s being offered,” he said, “not only from the financing side, but from the sales side as well.”

Both dealerships and Toyota Financial Services’ customer service center contact lease customers about their lease-end options. The captive has a loyalty team of 101 employees who focus completely on the lease termination process, Wells said. In the last fiscal year, which ended March 31, the team made 1.8 million outbound calls and took 340,000 inbound calls. The customer service center generated 120,000 leads to dealers with a 40 percent close rate, Wells said.

Wells said certified leasing is Toyota Financial’s long-term solution to the surge in used-car volumes. “It’s not a 90-day program. It’s part of a long-term strategy for sure,” he said. “We’ll watch it closely, and we’ll manage it just like we do our new-vehicle off-lease strategies.”

Wells added that the company needs to be aware of creating a balance between certified leasing and new-vehicle sales.

“You want to make your programs competitive, but you don’t want to step on your new-car sales. You’ve got to make sure you have a little bit of separation between how aggressive you make those certified programs from a leasing standpoint versus your new car programs,” he said.

Other lenders

Other lenders have taken similar approaches or are currently assessing a certified lease program.

Last month, Ally Financial launched Ally Pre-Owned SmartLease after a pilot earlier this year. Now the product is available to Ally’s more than 17,500 dealership partners nationwide, covering 15 brands and 35 models. Ally expects to expand the program to more vehicles.

BMW of North America also started a certified lease program earlier this year, CEO Ludwig Willisch said at the National Automobile Dealers Association convention in Las Vegas.

He said the company also initiated a pull-ahead program by waiving some consumers’ “last two or three” lease payments because the company had very few lease returns scheduled for the end of the year. c

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