Article

Why Auto Leasing Makes Sense for Your Credit Union in the ‘New Normal’

shiny new red and white cars for sale or lease in an empty white dealership showroom
By Mark Chandler

4 minutes

While low supply drives up new and used car prices, leasing can offer members more financial control while diversifying credit unions’ portfolios.

We’ve been here before, except last time it was toilet paper and hand sanitizer: Today’s shortage is new cars, and the impact on consumers is far greater than hours-long checkout lines or upset shoppers in grocery store parking lots. Dealers simply don’t have enough cars to sell, prices are higher than ever and there are surprisingly few incentives to help defray the cost of a new auto purchase. According to Kelley Blue Book, in June 2021, the estimated U.S. average transaction price for a light vehicle was $42,258. That’s an increase of over $2,500 (6.4%) from a year ago.  

Thousands of half-built cars sit in parking lots around the nation, silently awaiting chips. The natural order of things has yet again been turned upside-down courtesy of COVID-19—there’s a persistent microchip shortage and sky-high used vehicle prices. Who in the world would buy a car in a “new normal” like this?

Many people, as it turns out. There are customers coming to the end of their leases, those who simply need vehicles and many who are taking advantage of increased trade-in values to upgrade their vehicle. There’s also the burgeoning electric vehicle market that seems to (finally) have some sales momentum.

Consumer Demand Leads to Leasing

It’s pretty clear that there is a decent foundation of buyer demand. It’s also clear that consumers are looking for ways to benefit from heightened values while also protecting themselves from price volatility. Increasingly, they’re doing that with leases. Here at CULA, we have seen first-hand the recent increase in consumer interest: After a record-breaking Q4, CULA started 2021 with its best Q1 ever. While the start of the year is typically not great for auto sales, in Q1 2021, CULA recorded nearly $400 million in lease originations. The first six months of 2021 were also record-breaking, with over $950 million in lease originations. Compared to the same period in 2019, that’s an almost 90% increase and the highest period of originations in CULA’s history.

Here are three reasons why this seeming contradiction makes sense—and why shoppers are choosing leases during an extraordinary time of price and inventory volatility:   

Desire for control: When so much in the world is unstable, we crave stability in our personal lives and a sense of control over our surroundings. Vehicle leasing can give us that control,as it provides an escape from the risk of longer-term loans. Leasing gives consumers a shorter-term commitment, and that’s perfect for people who need a vehicle but can’t find the model they want. Credit unions can add to that feeling of comfort because they’re community-focused—an intrinsic value that we have all learned to cherish over the past 18 months.

Opportunity knocks: Vehicle buyers see a chance to leverage higher trade-in valuations. Leasing provides an opportunity to take advantage of a sellers’ market without having to commit to a long-term vehicle purchase or a high monthly payment. The benefit here is that lower monthly payment: According to CUESolutions provider Experian, lease payments on cars average $100 less per month and SUVs average $109 less per month than loan payments. That’s an opportunity for credit unions to better serve members. Knowing this, it’s a bit surprising that while leasing comprises more than 25% of vehicles financed every year, it’s offered by just 1.8% of credit unions nationwide. That seems to be the greatest opportunity of all: an excellent way to diversify portfolios, increase membership, yield and market share.

Adjusting to the realities of a “different normal”: Automotive market volatility is not going away soon. The microchip delay will likely last well into 2022, and production ramp-up may take the better part of the year. Prices for used cars aren’t expected to go down for a year or so. Some automakers also see this as a chance to shift into leaner production and build-to-order inventory models. It may well be that the supply of new vehicles never returns to 2018/2019 levels, while new car prices continue to climb—or at least don’t decline much. Add to this the emergence of EVs as a viable and mainstream option for buyers, and shorter-term, lower-payment leasing will continue to grow as a go-to finance option. For example, most people are ready and willing to lease an EV—far fewer are looking to pay the expense of owning one outright—and the shorter-term commitment of a lease means EV purchasers have the opportunity to keep on the cutting edge of that technology every few years.

So, in a “new normal” that we believe is on its way to being the normal, leasing is an excellent opportunity for credit unions to offer members a choice that gives them more control and leverage over their vehicle decisions, all while increasing the credit union’s portfolio diversity.

Mark Chandler is VP/business development of Credit Union Leasing of America, San Diego, the leader in indirect vehicle leasing for credit unions. CULA offers a solution that helps credit unions increase yield, diversify portfolios, capture additional business from current members and increase membership. Mark is an automobile finance expert with 30-plus years of experience serving credit unions and their members, assisting them with their car-buying needs. Before joining CULA, he was an executive coach and consultant in finance technology and spent nearly 20 years at Autoland, then the nation’s largest credit union car buying service, concluding his tenure as company president.

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