Why Don’t America’s Credit Unions Do More New Car Leasing?June 10, 2018
Credit unions have become a powerhouse when it comes to financing new and used car loans. Taken together, credit unions were the #1 source of auto loans in 2017.
Credit unions have achieved this competitive milestone for one big reason. Because credit unions are not-for-profit financial cooperatives, run for the primary benefit of their members, they do not need to generate big profits on their loans.
Compare this to banks and other commercial lenders, which are for-profit organizations that must generate a return for their shareholders. The result is higher interest rates for their loan customers, usually higher than what you will find from a credit union.
Credit Unions Have Stayed Away From Leasing
In comparison to their record of great success in auto loans, credit unions are nowhere to be found when it comes to providing leasing services to consumers. Less than five percent of America’s 5,500 credit unions are involved in leasing vehicles, according to a recent article in Automotive News. This is as nearly one out of three new vehicles is leased today. How can this be?
Credit Unions Faces Some Difficult Issues With Leasing
Most credit unions are locally-based entities. They may have a single location, or just a few local branches. Compared to a bank or a manufacturer’s leasing arm with a nationwide reach, they simply don’t have the scale. This translates into insufficient leasing volume to make it worthwhile. Other obstacles to greater credit union leasing include:
- Manufacturers usually subvent, or discount their leases to move more vehicles. Carmakers control everything from building the car, to leasing it, to taking it back at the end of the lease. This is not possible for a credit union, which did not manufacture the vehicle.
- Credit unions located in the wide-open spaces of places like Wyoming and Texas find leasing impractical, due to the mileage limits built into leases. Drivers in places like these routinely drive many more miles than most leases allow. This makes leasing more expensive and less desirable.
- Credit unions are traditionally very strong in financing used cars. Leasing used cars is difficult, because residual values are much lower on older vehicles. This makes affordable monthly payments high on leased used vehicles. The math just doesn’t work.
- A large proportion of new vehicle leasing is done with luxury brands, which most credit unions are unfamiliar with.
- Two or three decades ago, during the bad old days of vehicle leasing, it was very difficult to estimate residual values precisely. Many lenders took a bath when the leased cars came back and did not sell for anything near what they had planned on getting for them. This put many credit unions off of leasing.
There Are Many Leasing Benefits For Credit Unions
Credit unions that enter the leasing marketplace will find some appealing advantages from being involved:
- Leasing customers have higher credit scores – 740 on average
- Leasing is a great way for credit unions to do more new vehicle lending
- Leases generate higher returns to credit unions, compared to the average vehicle loan
- Leases have lower default rates
- Better analytics provide accurate residual values for returned leased vehicles
Leasing Can Prepare Credit Unions For The Future
Experts in the field believe that solid future benefits will accrue to credit unions that familiarize themselves with leasing now. New car leasing will continue to increase as vehicle prices and interest rates both rise, reducing the affordability of purchasing. And if credit unions can crack the code on how to successfully and affordably lease used vehicles, they will open an entire new market to consumers.
Then there’s the outlook for the future of leasing. The near future will see new opportunities for the leasing of electric, ride-sharing, and autonomous vehicles. Much of this activity will likely happen on a local level, opening this business up to credit unions. So it makes sense for credit unions to get on the new car leasing bandwagon now.