Tag Archive | "leasing"

As Leasing Grows, So Does F&I Opportunity

In a report released this past summer, Experian Automotive noted that new vehicle leasing had risen by 12.5 percent this year to date – it hit a record high since the firm started keeping track of the statistic in 2006. According to the report, leasing now accounts for as much as 27.5 percent of new vehicle financing in the first quarter of 2013, up from 24.4 percent in the same quarter in 2012.

At the same time, the report noted that lease payments were down – at an average of $459, down from $462 in 2012. That comes with longer loan terms for lease deals – 65 months in the first quarter of this year.

For dealers and agents, these numbers represent an opportunity. While there have always been successful exceptions, the majority of dealerships tend to focus their F&I efforts on finance deals, with leasing customers getting little-to-no attention. But these numbers demonstrate that lease customers are a large and growing segment of the population, and contrary to popularly held beliefs, F&I products are as relevant to them as to the finance customer.

“Leasing has certainly grown and continues to grow every month,” said Brian Crisorio, vice president, United Development Systems (UDS). “Some stores are going from one a month to 12 or more; in some stores leasing is just huge. Sure there are a couple of makes or models not as focused on leasing, but it seems like across the board everyone is in the leasing game.”

What products should dealers be focused on? The consensus was that many F&I products have a place in a lease deal. John Vecchioni, national sales director, United Car Care, noted that any wear and tear product is a good fit for a lease, as is any interior/exterior protection plan, key replacement or tire and wheel. He also noted, surprisingly, that GAP is a potential lease product as well.

Tony Dupaquier, director of F&I training, American Financial and Automotive Services, also put GAP at the top of his list. “Not all leases have GAP,” he noted, “that’s one of the things everyone keeps forgetting. You have to pay attention and make sure the lease has GAP in it, and if not, sell GAP. Most leases do have GAP in them, it’s built into the lease, but you sporadically find leases that do not come with GAP, and the business managers don’t even know it. They have to make sure GAP is included, and if not, sell GAP.”

Wear and tear or appearance protection plans – both interior, with chemical protection, and exterior with dent and ding – and tire and wheel, were the top ancillary products all three agreed that F&I managers need to be presenting to every lease customer.

“Any appearance product is typically a good one for the lease customer,” noted Crisorio. “Protecting the exterior finish as well as the interior from rips, tears and burns keeps the vehicle looking great. Paintless dent repair does much of the same thing – if it’s turned in with dents and dings, they get a bill. Keys are getting more expensive every year, so key replacement is becoming more important – a damaged or missing key when you turn in the car will be expensive. And tire and wheel is also a big one.”

Vecchioni noted that he sees more products being sold into leases as a bundle, rather than individually. “Bundling saves time, and that savings allows you to capitalize on features and benefits of the products along with the impact it brings that particular customer. Wear and tear protection along with an appearance package go together. You can bundle almost any product, just keep in mind they have to have some similar advantages that make sense.”

“A case could be made that there’s an advantage to selling a multi product versus selling individual products,” said Crisorio. “A lot of it depends on the approach of the F&I manager – train on the process regardless of the deal. Focus on options, rather than individual products, and give them the best protection for that customer.”

Dupaquier noted that he teaches his F&I managers to always start off with the lease products in a bundle. “If customer doesn’t want a package for whatever reason, they’ll typically go back and pick up an individual item,” he said, “so start with all of them packaged together. The most successful F&I departments I’m seeing, they’ll put together a lease package that will have all of them.”

The exceptions to the bundling rule seem to be two: prepaid maintenance and key replacement. All three agreed that those are great lease products, but are easier to sell as stand-alone products. It is harder, they noted, to build value for maintenance or key replacement. Dupaquier noted that in many cases, customers argue that they’ve never lost a key, so they don’t see the value in key replacement, and he sees prepaid maintenance as more of a customer retention tool than anything else. The trick on that, at least, is to price it effectively.

“A lot of business managers go with scheduled maintenance as their number one hit,” Dupaquier noted. “The only cautionary piece is your price point on it – on a lease, the product price is divided by the term of the lease, unlike a traditional finance deal, which is divided by 72+ months in some cases. So scheduled maintenance that is $400-$500 changes the lease price by such an amount of money it turns people off. When a dealership tries to make too much money on it, the customer goes away, since they can go get the services done cheaper elsewhere. And on the lease, the likelihood is that the customer is coming back to that dealership anyway because of the lease, so you have built in customer retention. So dealers should put the focus on the ancillary products, for the items customers are responsible for.”

At the end of the day, selling products into a lease deal should be no different than selling them into a financed deal. Other than specific objections that might come up, the approach should be exactly the same.

“The training for handling a lease customer is similar to training for a traditional finance deal or cash deal,” said Crisorio. “Much of our training is process related, and doesn’t change if the product does. Only some of the word tracks might change to fit that customer. The approach is identical. The important part is to build value in the products you’re presenting.”

“I would explain the conditions of the lease,” Dupaquier noted, “as part of the way they start off conversation. Make sure the customer is aware of their requirements as far as vehicle condition is concerned – the same type of disclosure as how many miles the vehicle can have. Things like windshield has to be 100 percent; any door dings they’re responsible for; no mismatched tires –they have to make sure they have four of the same; any paint fading or interior staining they’re responsible for, etc. So educate them on that, then it’s easy to generate demand for the product. Don’t approach it any different; work it similar to a finance deal, with the same basic approach.”

Vecchioni summed it up with a few tips for agents to bring back to their dealers. “1. Present every product to your customers; wear and tear products, appearance products, key replacement, and tire and wheel protection are products that make sense. 2. Ensure every regulation is complied with, going over every lease agreement and the customer’s obligation to the lease – it helps set up product.”

At the end of the day, all the forecasts show leasing as increasing in the near future, with more customers seeing it as a solid financial alternative to financing, especially with so many people taking credit hits in the last few years. Agents should be stressing the importance of those lease customers to their dealers, as it is a trend that isn’t going away any time soon, and it’s a profit opportunity that shouldn’t be missed. “Agents should embrace leasing as additional opportunities that earn money,” said Crisorio. “They have to support the dealer, and support the trends in the industry. There is nothing an agent can do to stop it, so embrace it, support it, and be a true partner to your dealer and help them in any way you can.”

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Leasing Is Back

Leasing is back with a vengeance. Attractive lease rates and high trade-in values are energizing its surge in popularity. As more and more of our clients’ customers see leasing as an attractive alternative for acquiring a new vehicle, our efforts in securing more products and profit on these transactions must intensify. If you want to stay ahead of the pack, it is critical that you find and relay creative methods to capitalize on the additional profit opportunities leasing presents for our clients’ F&I departments.

That being said, although leasing has become more popular with consumers, many F&I managers continue to overlook a lease’s potential — and, like cash deals, often put little or no effort in securing additional profit on them. We can attribute the lack of interest and enthusiasm F&I managers and sales managers have for leases to a lack of knowledge and understanding of how a lease really works. While there are many among us who do not know how a lease works, those who do embrace leasing with the same attitude and determination as finance deals and get great results.

Though certain parts of this article, such as how to calculate a lease payment, may seem elementary to some, the information is vital in developing the confidence and credibility necessary to go into a lease transaction and come out a winner. Information that will enhance their knowledge of leasing and provide them additional skills necessary to gain more commitments from their customers to purchase protection products and services on lease transactions. Learning how to perform basic lease calculations is the first step in understanding leasing and how it works.

Basic Lease Calculation
There are a few factors that need to be determined before you can calculate a lease payment. The first is the MSRP, which needs to include any dealer installed items (hard adds) that can be residualized; other items that cannot be residualized (soft adds) need to be rolled into the gross cap cost. The gross cap cost, otherwise known as the sale price, needs to be determined and must include any soft adds, upfront fees such as the acquisition fee, title and registration fees, dealer fee first payment or any other fees that will not be collected at the lease’s inception.

You must determine the cap reduction — better known as total money down — which can be in the form of a rebate, customer cash or trade equity (negative equity may be added to the net cap cost up to the lease companies maximum advance) that will be deducted from the gross cap cost to determine the net cap cost. The money factor needs to be determined; if the lease company provides you with an interest rate rather than a money factor, divide the interest rate by 2,400. For example, if the interest rate is 6%, 6 / 2,400 = 0.0025 money factor. All that’s left to select is the lease term, miles per year and residual percentage.

Once you have all the factors that will make up the structure of the lease, calculating the payment becomes a matter of basic arithmetic. Now, let’s put it all together and see exactly how a monthly lease payment is calculated.

Step 1: Determine the residual or future value portion of the lease that will be left at the end (MSRP x residual % = residual value).
Step 2: Determine the depreciation — that’s the portion of the lease which will be used (net cap cost – residual value = depreciation).
Step 3: Determine the monthly depreciation (depreciation / lease term = monthly depreciation).
Step 4: Determine the monthly rental charge (net cap cost + residual value x money factor).
Step 5: Determine the monthly sales tax (monthly depreciation + monthly rental charge = base payment x sales tax % = total monthly lease payment).

Now who needs a DMS to figure out a lease payment? I often say “knowledge is power,” and knowing how to calculate a lease using a simple calculator goes a long in projecting confidence and credibility all the while providing a solid foundation when explaining the concept of leasing to a customer. Here’s an example of how it all breaks down:

MSRP $35,000
Gross Cap Cost $33,000
Cap Reduction -$2,000
Fees +$1,260
Net Cap Cost =$32,260
Residual @ 52% $18,200
Lease Term 39 Months
Money Factor .00085
Miles Per Year 12,000
Sales Tax 6%
Step 1: Residual
$35,000 MSRP
x .52 Residual %
= $18,600 Residual
Step 2: Depreciation
$32,260 Net Cap Cost
-$18,200 Residual
= $14,060 Monthly Depreciation
Step 4: Monthly Rent Charge
$32,260 Net Cap Cost
+$18,200 Residual
= $50,460 Total
x .00085 Money Factor
= $42.89 Monthly Rent Charge
Step 5: Sales Tax
$360.51 Monthly Depreciation
+ $42.89 Monthly Rent Charge
= $403.40 Base Payment
x .06 Sales Tax %
= $24.20 Monthly Sales Tax
+ $403.40 Base Payment
= $427.60 Total Lease Payment

Start on the Right Foot
It is important to start the transition to F&I on the right foot, and perhaps more so during lease transactions, as they can be more of a challenge. Making a great first impression sets the tone for a better relationship with the customer. Meeting and greeting customers out in the showroom, in their comfort zone, rather than having them pulled along the dreaded walk to F&I is most important to setting a positive tone.

It is equally important that the F&I manager establish credibility right from the start. At the point of sale, customers are done with small talk and want to get right down to business. So teach your F&I managers to save the small talk for the sales consultants. F&I managers need to display confidence and credibility, and take on an advisory role. The more you know about your customer the better off you’ll be.

Albert Einstein once said “Know where to find the information and how to use it — That’s the secret of success.” So true; you will find indispensable information about your customer only if you ask, and that knowledge is the secret to F&I success. The information gathered by the F&I manager permits them to present products and gain commitments to purchase based on their customer’s criteria rather than theirs. Presenting based on a customer’s criteria is the game changer, as it makes better sense to the customer and is seen as much more valuable to them.

Of the most successful F&I managers, nearly all have one thing in common: They all adhere to a consistent method when making a presentation of F&I products and asking for the sale. Their willingness to remain consistent, along with their understanding that their process drives their performance, has permitted them to develop to the point that they are able to display confidence and credibility during every presentation. These attributes are essential in the F&I arena, and you can depend on them for consistently good results.

Starting on the right foot takes discipline and a willingness to let the process drive profits. It all starts with three key components; F&I managers need to “set the tone” they need to “establish credibility” from the start, and they must “gather information” they can use to form a presentation and gain commitment to enroll in F&I products and services based on their customers’ criteria.

Take it to the Next Level
Tell, don’t sell. Telling the features during your presentation, and selling the benefits when asking for the sale is the best advice anyone can offer. Telling allows the F&I manager to expose all the products in the shortest amount of time, all the while making it seem as though they are telling about one product with a whole lot of features. Selling during the presentation oftentimes will wear out the customer, causing the F&I manager to overlook a product that may have made better sense to their customer. Selling more products on leases is quite simple when the presentation makes sense. After making a telling presentation and the customer says “No”, try this:

“You really have only three responsibilities outside of making the payments on your leased vehicle: 1) maintain the vehicle, 2) provide insurance on it and 3) return it in satisfactory condition. That’s why I am surprised you didn’t select option three, which is the most popular option with our lease customers because it provides them with the most logical coverage. Excess wear and tear provides a remedy for unforeseen lease-end charges, the pre-paid maintenance program is set up to fulfill your requirement to maintain the vehicle and the tire-and-wheel program provides protection for the most vulnerable part of the vehicle. Now that I have restated the benefits of the programs, doesn’t it make sense to enroll?”

Though words speak volumes, utilizing all the tools F&I managers have at their disposal will significantly improve product sales as well. Tools such as evidence manuals, props, the lease-end “wear square” lease companies provide to the customer and the lease contract itself is a great selling tool. By showing customers the excess wear and tear portion of the terms on the contract and providing them with a remedy could be the difference in a sale or no sale of an environmental contract, paintless dent repair or excess wear-and-tear coverage. Hand them a set of keys with a price tag on them and remind them they will need both sets of keys at lease termination.

Do your clients’ F&I managers utilize an evidence manual that beholds information on the benefits of the products and services being offered, as well as proof of claims paid? That just might be the difference between a sale and a no sale. When all else fails, perhaps the F&I manager can rely on the “apartment” close:

Business Manager: “Do you mind if I share something with you?”
Customer: “No, not at all.”
Business Manager: “Leasing a vehicle is a lot like renting an apartment. May I explain?”
Customer: “Sure, go ahead.”
Business Manager: “There may be another way to look at it. Do you mind if I share something with you? Let’s say you’re renting an apartment and the air conditioner stops working. Are you going to pay for the repairs yourself? Or will you be relying on the landlord to pay for the repairs?”
Customer: “Why, the landlord, of course.”
Business Manager: “What if the roof begins to leak?”
Customer: “I’ll call the landlord.”
Business Manager: What happens when you leave the apartment? Are you going to patch and repaint the walls where you hung your paintings? Are you going to clean or replace the carpet that may have become stained while you were living in the apartment?”
Customer: “No, I would expect the landlord to take care that.”
Business Manager: “I couldn’t agree with you more. I would feel the same way. Leasing is a lot like renting an apartment. If something should go wrong mechanically with the vehicle, you can rely on the manufacturer’s warranty to make the repairs just like you would expect the landlord to make the repairs to the air conditioner and roof. When you turn the vehicle in to the lease company, like the landlord, you should expect some wear and tear. However, if the landlord determines excess wear and tear, they’re able to retain all or a portion of your deposit, right?”
Customer: “Yeah, I guess so.”
Business Manager: “Your vehicle lease works much the same way, but there is no security deposit for the leasing company to recover from. So if the lease company determines excess wear and tear they will send you a bill for the repairs, regardless if they make the repairs or not. Can you see how spending just a few dollars more per month now could protect you from the potential of spending hundreds or even thousands of dollars in unexpected lease end expenses down the road?”
Customer: “Yes. That makes sense!”

Sure that makes sense, and a sensible, no-nonsense presentation will make a world of difference. Leasing is a great choice for customers that are interested in attaining the lowest cost of driving. A lease allows customers to get a new vehicle every few years, it minimizes residual risk of purchasing and allows the driver to drive a vehicle that is (in most cases) under factory warranty throughout the term of the lease. However, specific responsibilities remain that go along with a lease. It is through our willingness to uphold a process regardless of a lease, finance or cash deal that we will yield the greatest result.

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Ally Introduces Financing Product With 48th Month Sell Option

Ally Financial Inc. debuted in five markets yesterday a new financing product that offers the benefits of leasing, but provides the advantages of owning a vehicle at a fixed rate and payment. The difference is that buyers who opt for the program can sell their vehicle back to Ally at the 48th month at a pre-determined price.

Called Ally Buyer’s Choice, the financing option was introduced more than a year ago to the Canadian Market in response to the Bank Act, which prevents banks there from offering leasing. Now Ally is bringing it to the U.S. market, introducing it yesterday at General Motors and Chrysler dealerships in California, Florida, Illinois, New York and Texas, according to F&I and Showroom magazine.

“As a bank, you can’t lease in Canada. So, what gave rise to it up there is we were looking for something that would allow us to have the benefits of leasing in a financing arrangement,” said Tim Russi, executive vice present for Ally’s North American Operations. “After we saw how the program performed up there, we thought there would be a reasonably-sized opportunity in the U.S. [market] to provide the product.”

As for the 48-month sell option, Russi said the predetermined value is calculated the same way Ally sets its lease residuals. He added that loan terms do not factor into the calculation, as two people who finance the same vehicle at different terms will get the same amount back if opt for the sell option. As for how the company landed on month 48 for the sell option, Russi said that’s the average life of the company’s financing arrangement.

The main thrust of the product is to eliminate consumer fears of making a large purchase in these still-unsettling economic times, Russi said. But the product also aims to reduce consumer buying cycles, drive floor traffic, and, maybe, help dealers replenish their used-vehicle inventory. He also noted another possible advantage to the program.

“We don’t do a lot of 84 [months], but we’d like to see 84 with this type of structure,” said Russi. “But if you’re a consumer who is signing up for 84 months’ worth of payment, you’d love to drop that term and have an idea of the value you can get out with.”

Russi added that dealers were trained on a new calculator the company developed to help them structure deals under the new program. He added that if the value of the vehicle is higher than the predetermined price at the 48th month, the owner can opt to sell the vehicle on his or her own or continue making payments.

“I think dealers see the value in it because it gives them another way to meet consumers’ needs and overcome some of their fears in making a large purchase,” Russi said. “For the consumer, there might be a lot of reasons why [he or she] may need to get out of the deal — it could be an employment- or a family-related [reason]. So, this just provides the consumer with certainly in that they can sell their vehicle to us at a set price if [he or she] needs to.”

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March Opens With Better Floor Traffic, Strong Closing Ratio, Reports CNW

An increase in floor traffic and a strong closing ratio indicate that new-vehicle sales in March will improve 11 percent from the year-ago period, according to CNW’s Retail Automotive Summary.

The recent earthquake and tsunami disaster in Japan, however, is expected to impact the tight supply chain of Toyota, Nissan and Honda, reported F&I and Showroom. Disruptions to this chain could occur within the next 45 days and impact vehicles built in Japan and shipped to the United States, as well as vehicles assembled in the United Stated with critical imported components, wrote CNW’s Art Spinella.

Despite Japan’s natural disaster and the potential negative effects on the industry worldwide, there were some positive signs in the opening days of March. Floor traffic is up 13.7 percent and closing ratios are up 1.22 percent this month compared to the year-ago period. As a result, same-store sales are up 13.77 percent compared to the year-ago period.

In addition, the CNW Jitters Index continues to fall, dropping 1.1 percent in March and indicating that consumers seem more at ease with their economic issues, according to Spinella.

These positive consumer and industry trends will help push new-vehicle sales to 1.2 million units in March, an improvement of 11 percent from the year-ago period and resulting in the best March since 2008. However, the industry will still fall below the 1.67 million units recorded in 2000 when the industry sold more than 17 million units.

Credit scores continue to drop in March, following a steady decline since January of last year. “The finance industry continues to approve loans for what were just a year ago marginal buyers,” Spinella wrote.

The average FICO score for new-car buyers is 685, including leasing and balloon-note options.

The share of new-vehicle buyers with FICO scores of 670 or less is forecasted to reach 12.78 percent of total loan approvals in March.

Subprime loan approvals improved in March for new and used vehicles. On the new-car side, subprime approvals increased 28.5 percent compared to the year-ago period.

Cash deals continued to decline, while leasing gained some ground in February, according to Spinella.

Leasing accounted for 23.81 percent share of new-vehicle deals and cash accounted for 6.89 percent of deals. Finance accounted for a majority of deals, with a share of 69.29 percent.

Looser credit is expected to help used-vehicle sales improve in March, making the first quarter of 2011 the best one since 2008, according to Spinella.

Total used-vehicle sales are forecasted to reach 2.5 million in March, an increase of 5.5 percent from the year-ago period. The improvement is spread across all channels. Franchised dealers, independent dealers and private-party sales are expected to jump 0.5 percent, 10.7 percent and 5.4 percent, respectively.

Year-to-date sales are expected to reach 6.3 million units, compared to the year-ago result of 5.9 million units.

The average FICO score of used-vehicle buyers continued to fall in March and is expected to reach 615. Nearly 39 percent of used-vehicle buyers are expected to fall below 670.

Despite the positive trends in used-vehicle sales, early March data shows that the combination of a tightened used-vehicle supply and high consumer traffic may cause a shift in the mix of vehicles available. One reason for this shift is gas prices, which may send consumers to the “car side,” Spinella suggests.

“While this will have little impact on casual sales, it will definitely affect franchised and independent dealerships that now have to beware of overloading lots with trucks or being forced to lower truck prices to facilitate a sale,” Spinella writes.

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Wolters Kluwer Offers Universal Lease Agreements

Wolters Kluwer Financial Services is now offering captive finance companies, lenders and auto dealerships universal closed-end motor vehicle lease agreements for all 50 states.

Wolters Kluwer’s universal close-end motor vehicle lease agreements are designed to meet Regulation M requirements and any other state and federal requirements on auto leasing. Offered in both print and e-form, the contracts are suitable for transactions with equal monthly payments or single payment. Additionally, the contracts are customizable, allowing captives and lenders the ability to include products and features unique to their leasing programs.

These lease agreements help ensure auto leases are in compliance with current federal and state-specific regulatory requirements, while also helping simplify leasing and back-office processes.

By relying on Wolters Kluwer Financial Services’ standard lease documents, captives and lenders can significantly lower costs associated with monitoring regulatory changes and developing and producing their own lease contracts. For dealerships, a universal lease agreement allows them to simplify and eliminate the programming and inventory costs they incur when using lease agreements from multiple providers.

The contracts are maintained by Wolter Kluwer’s compliance experts, who monitor legislative and regulatory changes affecting the indirect lending finance industry in 51 U.S. jurisdictions, and are protected by the company’s limited compliance warranty.

“Our indirect lending business was created to help lenders and dealerships comprehensively address various aspects of regulatory compliance,” said Lee Domingue, CEO of indirect lending at Wolters Kluwer Financial Services. “This offering is yet another example of that commitment. By providing an industry standard for auto lease contracts, we can help lease companies, lenders and dealers simplify the leasing process for their organizations and the customers they serve.”

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