Auto industry experts say they expect used-vehicle leasing to gain momentum this year.
'The promise of used-vehicle leasing hasn't been fulfilled so far, primarily because there hasn't been enough of a differential between new-car lease payments, and those for used cars,' said Ron Loshin, president of Bank Lease Consultants Inc. of Larkspur, Calif.
Leasing companies and analysts projected just two years ago that by now, U.S. customers would lease 1.25 million to 1.5 million used vehicles a year, said Art Spinella, general manager of CNW Marketing/Research of Bandon, Ore. Instead, CNW projects only about 785,000 used leases this year, up from 607,000 last year.
This year's estimate is double the 392,000 used-vehicle leases CNW says were written for 1997. But Spinella and others said that most of the big jump came from only a few major players, such as GE Capital Auto Financial Services.
Nevertheless, Loshin said he expects used-vehicle leasing to take off shortly.
Used-vehicle lease volume has been a letdown so far, because:
The market has been flooded by attractively priced, short-term new-vehicle leases, often backed by big factory incentives.
There has not been a big enough difference in monthly payments between new- and used-vehicle leases.
The risk, complexity and difficulty of used leasing - especially setting a residual value on used vehicles - discourages some automakers and independent funding sources.
Most Americans are not even aware they can lease a used car or truck.
Used-vehicle leasing leaped from 46,000 in 1990 to 281,000 in 1995, according to CNW. But once automakers flooded the market with short-term, 2- and 3-year leases on new vehicles over the past few years - with attractively low monthly payments - they drained off much of the usual market for used-car purchases and leases.
Now, the market is flooded with vehicles that are just coming off these leases. And many of them are in pretty good shape, having traveled only 24,000 or fewer miles.
New vs. used
That would seem to ensure an ample supply of used vehicles for leasing, but another obstacle has emerged: pricing.
Leases on this ocean of 'nearly new' vehicles are just too costly compared to lease bargains on brand-new vehicles. Spinella said that the typical differential is only $40 to $50 a month between a new vehicle with a subvented, or manufacturer-subsidized, lease, vs. a 2-year-old version of the same model. That discourages dealership salespeople from pushing the used alternative.
'People just keep going to new cars,' said Rod Couts, executive director of the National Vehicle Leasing Association in Burlingame, Calif.
Automakers have focused on subsidizing new-car leasing to keep their factories humming. And for the most part, they have not expressed much interest in goosing used-vehicle leasing, experts said.
Ford Motor Credit Co. has the most at stake, since it is the market leader in two-year leases, and it seems to be giving used leases a shot in the arm.
The factories are discouraged by the difficulty of setting appropriate residual values for used vehicles.
'It takes an extra effort, because you're not dealing with a set commodity,' said Charles Vogelheim, editor of the Kelley Blue Book, the Irvine, Calif., industry guidebook of vehicle values.
'A (new) Taurus is a Taurus, and a Camry is a Camry, but a 3-year-old one is an individual; it's different. And you have to have some process in place to handle those differences in mileage, for example.'
Chuck Parker, president of the Automotive Information Network, a remarketing research organization based in Manhattan Beach, Calif., said it really should not be that hard.
'There's a mental set that says somehow or other it is difficult to project the residual value of these vehicles at some time in the future, because it is preowned,' he said.
'It would seem that if a vehicle has some age on it, that particular make or model has established a track record that is available to the lessor. Whereas, with a new vehicle, it's quite often a roll of the dice,' he said.
Chicken or the egg?
Parker believes the slow growth of used leasing so far is a chicken-or-the-egg dilemma.
'The manufacturing infrastructure is new-car oriented, which it has to be, so preowned vehicles aren't receiving the degree of financial support, advertising and, in general, the branding that is so necessary to accomplish any kind of momentum,' he said.
Spinella said his surveys show that more than 72 percent of new-vehicle shoppers go into dealerships understanding they can lease instead of purchase. But only 8 percent of used-car shoppers understand that they could lease, he said.
'On the new-car side, people hear about leasing from friends, relatives, business associates and from advertising,' Spinella said. 'But on the used-car side, the only place they may hear about it is at the dealership. And if no one there tells them they can do it, they don't know it.'
However, the automakers are displaying a much bigger interest in used vehicles in general, and that may spill over into used leasing.
One indication is that automakers are taking major steps to enhance consumer perceptions of used vehicles, by certifying them and giving them warranties. 'It's creating an entirely new niche of dependable used cars, in which consumers have confidence and trust,' Loshin said. 'And a certified used car is in most respects a competitive substitute for a new vehicle.'
Not incidentally, the car companies also realize customers are willing to pay a premium for a certified used car.
Parker said Ford and Toyota Motor Sales U.S.A. Inc. are being especially aggressive about certifying used cars because they leased an 'inordinate' number of vehicles over the past few years. Therefore, they have 'big portfolios of preowned vehicles that are conducive to branding through used-vehicle leasing, and to a second life,' he said.
Money to be made
'Manufacturers in general are taking a stronger and stronger position in the redistribution economy,' said Jim Mateyka, vice president of consulting firm A.T. Kearney Inc., in Southfield, Mich.
'There's a lot of money to be made in the after-the-sale business, and over a longer period of time, the value of a manufacturer's brand and reconditioning program really shows up in the prices of used cars,' he said.
Women may represent an especially promising market for used-car leasing, Spinella said. Women represent about 30 percent of new-car lease customers, but 50 percent of used-vehicle customers, he said.
'They tend to be a little smarter about money, and less emotionally attached,' to new cars than men, Spinella said.
Mateyka said he is convinced used leasing will take off: 'It's inevitable.'
Dale D. Buss is a Detroit-area free-lance reporter.