But General Motors Co.’s foray into subprime leasing is a smart move as long as it proceeds with caution.
The credit crisis and recession expanded the subprime segment. Some of these “new” subprime customers walked away from their mortgages when their property values plunged. Under normal circumstances, they would pay their bills on time.
A lease can coax these people back into the new-vehicle market at affordable terms while helping GM move some metal.
Leasing offers a monthly payment that’s lower than that of a comparable finance contract because the payment is only based on the vehicle’s value during the lease term. Get the customer to put money down, and you lower the monthly payment even more and reduce the lessor’s risk.
Vehicles are typically leased at shorter terms than finance contracts -- often three to four years, as opposed to five years or more for a car loan. So the customer will be back for a new vehicle quicker.
And the subprime lease can improve customer loyalty: Research has shown that customers are extremely loyal to businesses that help restore their credit. Lease renewal rates also are typically much higher than repurchase rates.
As a long-time subprime lender, AmeriCredit Corp. -- now GM Financial -- has expertise dealing with risky credit. As long as GM Financial is prudent, subprime leasing is a win-win initiative for the manufacturer, its dealers and consumers.