In early 1999, Ford Motor Credit Co. will begin a push into used-vehicle leasing.
The company's 1999 used-vehicle lease strategy focuses on the Ford Expedition, Explorer and F series, high-volume models coming off short-term leases in growing numbers.
Ford's bullishness on used-vehicle leasing reflects growing industry confidence that the success of new-vehicle leasing can be transferred to the used-vehicle market.
The industry outlook for used-vehicle leases is optimistic, although the growth of used-vehicle leasing is not expected to match the heady pace experienced by new-vehicle leasing earlier in this decade.
But before used-vehicle leasing will grow, consumer awareness must increase, and dealers must be convinced it is worth the effort. Used-vehicle leasing is more time-consuming than new-vehicle leasing for dealers because each lease must reflect vehicle condition.
Several factors underpin the robust outlook for used-vehicle leasing.
A growing volume of 2- and 3-year-old vehicles coming off first-cycle leases.
More conservative incentives on new-vehicle leases, making used-vehicle leases more competitive.
Manufacturer-sponsored used-vehicle certification programs that help minimize the risk to lessors of longer lease terms by backing the older units with extended warranties.
Price pressure in the used-car market that forces consumers to turn to the lower monthly payments available through leasing.
'We are going to try to grow the used-vehicle leasing business pretty significantly,' said Tim Gates, Ford Credit Red Carpet Lease manager. He would not disclose specific targets.
Ford will emphasize used-lease training at its dealerships. Currently, used-vehicle leases represent a 'single digit' percentage of total Ford Credit leases, Gates said.
Ford Credit is not alone in its growth strategy.
Used-vehicle leasing is 'one of the last untapped niches in auto financing,' said Bruce Lee, spokesman for Mercedes-Benz Credit Corp. in Norwalk, Conn. 'It is set to explode into the mainstream.'
The Mercedes-Benz Starmark program of certified used units, which was rolled out this year, will bolster used-vehicle leases, Lee said.
For example, Starmark cars carry a $500 residual value enhancement and are offered with money factors - which are akin to purchase financing rates - below standard rates because certification enhances vehicle value, Lee said. In addition, a growing inventory of used units is expected as new-vehicle sales climb.
The Mercedes-Benz Credit Corp. subsidiary that handles non-Mercedes auto financing will begin a used-car leasing program near the end of March, Lee said. The program will be offered through Debis Financial Services Inc.
To foster its growth strategy, Ford Credit may offer longer leases on used vehicles to reduce monthly payments, Gates said.
Today, most Ford Credit used-vehicle leases are written for 24 months, although terms have been extended up to 36 months recently.
'Twelve months from now that could be longer in particular segments,' Gates said. 'The first round of Expeditions is coming off two-year leases. They may be ideally suited for a four-year (second) lease.'
Ford Credit is targeting light trucks because of Ford Motor Co.'s strength in those market segments, Gates said. Extending the strategy to cars is under study.
Used-vehicle leasing has been stunted because new-vehicle leases are given incentives by financing agencies, creating monthly payments on par with used-vehicle payments.
Longer lease terms on used vehicles will lower monthly payments, said Randall McCathren, executive vice president at Bank Lease Consultants Inc. in Nashville, Tenn.
The growing number of used-vehicle certification programs backed by extended manufacturer warranties also will help make lending institutions more comfortable with longer term leases, he said.
Ford needs to convince dealers of the benefits because used-vehicle leasing requires more work by the dealership than new-vehicle leasing.
New-vehicle leases are based on window-sticker value. But every used-vehicle lease must be adjusted to reflect vehicle condition.
Pressure on used-vehicle margins, competition from superstores offering used-vehicle leases and leasing's ability to keep customers loyal may help convince dealers, McCathren said.
Today, leasing accounts for 4 to 5 percent of used-vehicle retail volume, said George Reganis, an independent automotive marketing and leasing analyst in Detroit. But 'captive finance companies, major banks and even smaller lending institutions such as credit unions are looking at used-car leasing,' he said. 'It will grow, but not to the extent we saw on the new-car side.' Through September 1998, leasing accounted for 30 percent of new-vehicle retail volume, Reganis said.
GE Capital Auto Financial Services is already on the bandwagon. In June, GE Capital announced an aggressive plan to increase used-vehicle lease contracts. GE Capital had a lease portfolio of $13.4 billion in 1997.