Used-vehicle leasing is one way to help manage the spurt in off-lease vehicles expected to hit the market over the next few years.
But some words of caution from Tom Webb, Cox Automotive chief economist: The practice of leasing used cars and trucks isn’t widespread because lessors don’t want to chance moving any residual value risk associated with a new-vehicle lease contract to the next contract.
He also said franchise dealers that sell used vehicles though leases, in general, don’t “really have an appetite for that age category vehicle” when it returns to the market the second time around.
But limiting used-vehicle leasing to certified used-vehicles, which are extremely important to protecting residual values, would help, especially if the programs are well-run, he said.
“What the dealer is willing to pay at wholesale is dependent on their ability to retail it at a certain gross within a certain period of time, and an attractive lease product probably helps that proposition,” said Webb, during Manheim’s quarterly conference call with journalists and analysts this month.
Used vehicles that have a significant spread between their retail value as calculated by NADA Used Car Guide and their transaction price, which is typically less, are good candidates for leasing at Extreme Dodge-Chrysler-Jeep-Ram in Jackson, Mich., owned by Wes Lutz.
Vehicles that hold their value well, such as Jeep Wranglers and Grand Cherokees, typically fall into that category, as do expensive vehicles, said Lutz, who has been leasing noncertified used vehicles for about two years.
“If you have a new $50,000 vehicle, that comes back with an off-lease value at $24,000 after two years, which is typical. And in the next two years it might be worth $14,000. You’ve only got $10,000 worth of lost value” on a used-car lease, Lutz said. “So expensive cars tend to do well the second time around,” he added.
An industrywide increase in the number of off-lease vehicles helped lift sales of certified used vehicles 4 percent to 1,324,676 in the first half of 2016.
That’s roughly half of the 2.7 million to 2.8 million certified used-vehicles Webb predicts the industry will sell this year. That would be up from 2,553,548 certified units sold in 2015 and mirrored the 2.55 million off-lease vehicles that re-entered the market last year.
Off-lease unit growth will outpace CPO sales growth this year and beyond, said Webb. He predicts that off-lease units will total about 3.1 million this year and grow to 3.6 million in 2017 and to more than 4 million in 2018.