Lease Here: Pay Here Collateral Protection

It isn’t often that multiple market factors align to create substantial opportunity, but the upcoming year or two appear to be one of those times for dealers who are prepared. A non-prime, used car leasing program is uniquely positioned to maximize the upcoming recessionary environment for a franchise or independent dealer. Leveraging the affordability benefit of the lease contract will allow the dealer to provide quality transportation at payments that more closely match the subprime consumers’ budget in today’s world. Used car prices will remain historically elevated and, combined with the higher interest rate environment, will mean affordability will be critical to maintaining portfolio performance through these challenges. Delinquencies in most subprime RISC portfolios will rise and losses will increase over the short to medium term, however, offering a lower PTI with a shorter term on a lease can help to outperform the market and realize higher profitability .In conjunction, traditional lenders will pull back to reduce their exposure to higher credit risk tiers which will leave consumers at the upper end of the subprime, and lower end of the non-prime tiers with fewer options for financing over the next few years. This vacuum will be filled by dealers with in-house financing programs and allow them to not only increase their originations volume but increase it with relatively higher credit scores than they have had access to since the Great Recession of 2008-2009. This Advantageous Selection will positively impact portfolio performance for the next three to four years. As noted, the overall trend will likely be positive for a leasing dealer in this market, however, it is a given that not all subprime customers will be successful in completing their full term, particularly with the numerous economic headwinds they are currently wrestling. This will result in higher percentages of consumers eventually seeking the protection of the bankruptcy process throughout the upcoming period as the data is already indicating. Choosing to use the lease model will help to insulate a LHPH dealer from the headaches and operational inefficiencies of dealing with the BK process, allowing the dealer to remain focused on providing the best customer experience they can across the rest of their program.