By Ray Birch
CINCINNATI—Credit unions should expect their used car loan portfolios to grow even larger this year, says one automotive expert, who points out a large number of leased vehicles are coming back onto the market—for a brand new reason.
While leased vehicles coming back to the market at the end of their terms have been adding cars to dealers’ lots as they fight for inventory due to ongoing new car production issues and strong demand, dealers are now reaching out to consumers who still have plenty of time left on their leases, offering to buy those vehicles back.
“It used to be a little difficult for lease holders to exit a lease early,” said Scot Hall. “Not now.”
Hall explained dealers are scouring through their list of leases, held by the bank that handles the contracts.
“That might be US Bank, Honda Financial, GM Financial…,” said Hall. “Dealers have always worked through these lists as a means to drum up new sales, but they have typically targeted customers who are near the end of their lease term. Now they're focusing on people midterm or even early in the lease.”
Throughout 2021 and now into 2022, car lease marketplaces such as Swapalease.com saw nearly a 500% increase in the number of leases being bought out, Hall said.
‘Never Seen Anything Like This’
Hall said dealers are taking the new tack because they realize the new car production shortage, brought on by the shortage of microchips and other supply chain issues will continue well into 2022.
“I've been in this business 25-plus years, and I've never seen anything like what we are seeing on the inventory side today,” said Hall. “The dealers are scrambling to get used cars. Looking at lease buybacks is definitely one of those avenues, especially with all the leasing that has been going on the last several years.”
With the buybacks, Hall said some lease-holders could walk away with cash in their hands, due to such high used car values today, with the residual value of the leased vehicle being markedly higher than what was projected when the lease was written.
Scot Hall
“However, if you walk away with, for example, $2,000, you will still face the higher price when you go to buy or lease another car,” said Hall. “It’s just like the housing market today.”
What Lenders Should Expect
Lenders should expect some very high-quality cars to come back on the market from this new dealer approach to filling their lots. Hall believes the lease buyouts will help lenders, especially credit unions that play heavily in the used space.
“I argue that these may be some of the best used vehicles you will ever see on the market, for these reasons: Most vehicles under lease contract are under relatively short lease contracts, typically about 36, which means that if somebody steps out one of those cars during the first three-year period it's still under warranty, and in many cases maintenance is included for some of these new cars. The car, too, has only been out on the road maybe a couple years—so less time for damage and less time to drive through all the salt in the winter.”
Hall also agreed the mileage on many leased vehicles today is far below where it would typically be due to people working from home and driving less.
“I believe this will lead automakers to begin to lower the mileage limits they currently have on lease contracts,” said Hall. “I really think we’re going to see that.”
Turning to the microchip shortage, which recent reports indicate may have recently taken a turn for the worse, Hall said he believes it could impact electric vehicle production.
“I saw a recent report that shows electric vehicles on average require 2,000 microchips, roughly double the number of microchips in an internal combustion engine (ICE) vehicle,” said Hall.
Taking a Charge Out of EVs
Hall added he agrees the development will slow the advance of EVs—into the market.
“Maybe somebody wants to buy an electric vehicle, but then there is a shortage. At some point they just need a car, whether that is gas-powered or electric,” said Hall.
Commerce Secretary Gina Raimondo recently stated that automakers’ electric vehicle plans are imperiled by the ongoing shortage of computer semiconductors.
What the chip shortage is also doing today in forcing automakers to focus on their higher-end vehicles, simply vehicles that return the greatest profit, said Hall.
“A fully loaded Suburban makes Chevy a lot more money than their Spark,” said Hall.