Leasing Continues Its Comeback

Dealers and auto lenders—primarily captive finance companies, which dominate automotive leasing—report a fairly strong comeback in the latest quarter, as automakers increase lease incentives as a way to offer more affordable monthly payments.

The leasing comeback is particularly welcome for retail chains with a high mix of luxury brands, where leasing historically has been much more common than average. That’s especially true for the Penske Automotive Group.

“We’re up 8% year-over-year, up to 32% of our new sales” from leasing, says Shelley Hulgrave, chief financial officer for Penske Automotive, Bloomfield Hills, MI.  

For context, lease penetration for the whole new-car industry was 24% of retail sales in the first quarter, up from 19% a year earlier, according to Power Information Network data cited by Ford Credit in its report on first-quarter results.

Premium brands account for 72% of Penske Automotive’s worldwide revenue, the company says in a report on first-quarter earnings. Those include BMW, the group’s biggest seller by revenue, plus Lexus, Audi, Mercedes-Benz, Porsche and Jaguar Land Rover.

Luxury-brand buyers are good candidates for leasing for a couple of reasons. One is that leasing offers more car for the money since a lease customer only has to finance the difference between the upfront cost and the predetermined residual value.

Group 1 Automotive, Houston, reports luxury brands accounted for 42% of its first-quarter revenue; Lithia Motors, Medford, OR, reports30% of its revenue from luxury brands. Asbury Automotive Group, Duluth, GA, says luxury brands accounted for 29% of its new-vehicle revenue in Q1.

Roger Penske, chair and CEO of Penske Automotive, says while discussing the fourth quarter of 2022 that the group’s lease penetration had fallen as low as 11%, vs. 55% pre-pandemic. “Those customers are stickier,” Penske says. “We want those used cars coming back.”

Leasing cuts both ways for dealerships. Benefits include more affordable monthly payments for consumers, a shorter trade cycle than loans and greater consumer loyalty. In addition, the originating dealer gets first dibs on lease returns, which often sell profitably as reconditioned, certified pre-owned cars.

A downside is that dealerships typically earn a flat fee for lease originations without the opportunity to earn dealer reserve for originating a loan.

Dealer reserve is a share of the customer’s final interest rate. The public groups all report the vast majority of their F&I income comes from product sales, as opposed to dealer reserve. Still, dealer reserve is important.

What’s more, product sales are typically lower for leases, too. Most leases come with Guaranteed Asset Protection (GAP) included, so lease customers don’t buy it at the dealership. If a vehicle is stolen or totaled in an accident, GAP pays the difference between the actual value of the vehicle and the remaining balance on the loan or lease.

Lease customers are also less likely to purchase extended-service contracts, because most leased vehicles are under the OEM warranty for the life of the lease. However, dealers report that lease customers do buy some F&I products, such as prepaid maintenance and protection products like tire-and-wheel coverage.

“With subvented leasing—and that’s where a lot of the incentive dollars are still going—we’re basically at a normalized state of incentive dollars in leasing, which obviously is in flat fees. So, it does impact our F&I,” says Bryan DeBoer, Lithia’s chief executive officer.

Lease penetration is lower for the domestic brands as a share of total new-vehicle retail volume. But leasing is still substantial and increasing for them.

GM Financial reports its lease share of U.S. sales for General Motors was 17.2% for the first quarter of 2024, up from 16.5% a year ago. In the fourth quarter of 2023, it was 13.9%.

Ford Credit says its lease share in the first quarter was 14%, up from 11% a year ago. However, Ford Credit’s lease share is typically below the industry average. Ford says that’s partly because its numerous pickup buyers are not usually lease buyers, especially if they use their trucks for work.