How Focus On Leasing Can Boost CU Auto- Lending Business

One of the biggest opportunities in the auto market right now may not be in sales.

Though overal U.S. household debt has been rising since the end of the Great Recession, some would- be buyers are stil hesitant to take on new loans, even for something as essential as a car.

And that, say some insiders and experts, is where credit unions with strong auto-leasing programs can capitalize.

"Look at it this way," said David Jacobson, CEO at GrooveCar in Hauppauge, N.Y. "People don't want to part with cash. This is a way to get into a car with little or nothing down, and since 2008, cash is king. A lot of it has to do with little or no money down on a lease."

Manufacturers are also pushing it hard, said Jacobson, but a bigger factor may be that the days of leasing as exclusive to luxury cars are long gone.

"It's no longer a luxury product," he said adding "People don't want to own cars because they're not appreciating assets."

Tide May Be Turning

Though auto leasing was not widely used by CU members during the last recession, the tide may be turning, based on reports from several CEOs who spoke with Credit Union Journal.

At East Windsor, N.J.-based McGraw-Hil FCU, VP of Lending Kathleen Petrel i said she believes leasing is the best growth opportunity in auto lending for credit unions right now. The $310 mil ion credit union recently signed on for GrooveCar's CU Xpress Lease service, and expects to go live with it in April.

"With leasing, a consumer can absolutely get more car for their money and a much more affordable monthly payment, and they don't have to hold on to it for seven years," she said.

What McGraw-Hil and other credit unions are banking on is recapturing the business once the lease term ends, financing the remaining value of the vehicle into a traditional auto loan.

McGraw-Hil 's expectations, according to Petrel i, are "that they wil like the car they've leased and buy it out of the lease for a family member or someone going to col ege or just want to use it; we're thinking that members wil just want to convert it to an auto loan."

Petrel i said that leasing can also be more profitable in the long run than a traditional loan, though that's dependent upon the rate, lease factor and how much is leased vs. loaned.

Steve Klees, SVP of specialty channels at EFG Companies, concurred with that strategy.

EFG recently started offering DrivingSense, a hybrid financing option on auto lending currently being rol ed out to credit unions. Klees noted that the advantage of leasing (or hybrid programs like DrivingSense) is that it's "a great opportunity for the credit union to rol it into a three- or four-year conventional refinanced contract and retain that membership at the end of that [lease period]."

At Bethpage FCU in Bethpage, N.Y., Michel e Dean, VP of lending and investment services, said that more than half the cars in her market place are leased, "so for us not to offer that product takes a lot of opportunities off the table."

Overal leasing at Bethpage increased by more than 160% in 2013, from $29 mil ion to $76 mil ion. As a result of that massive growth, said Dean, the CU is expecting leasing to remain flat this year if only because it would be so hard to top last year's results. Additional y the credit union wil be shifting its focus more toward direct lending.

Early Stages

Space City CU in Houston is one institution that is betting on increased popularity in the leasing market.

The $64 mil ion-asset credit union worked with a leasing company about seven years ago "and it worked real y wel , but I think it worked too wel for the consumer, and the company ended up going out of business. But the members real y liked it," said Space City CU's CEO Craig Rohden.

Space City CU recently rol ed out a new online car-buying service with Members Private Sale that includes a lease option, though the CU hasn't had any members take out a lease on it yet. The service had been up and running for less than a month when Rohden spoke to Credit Union Journal. He said the Houston market is awash with ads for auto leasing.

"We haven't had anybody do a lease yet, but I may be the first," noted Rohden. "My car is for sale now on the website [via Members Private Sale], so as soon as I sel my car I'm going to be comparing the lease option to 72-month financing."

At Arvada, Colo.'s Partner Colorado Credit Union, CEO Sundie Seefried said that her CU does not currently offer a lease option for members, "but it was in our plan this year to take a look at and see if that's something we want to do."

Not Convinced

Other credit unions, however, are staying out of the leasing game and have no plans to get in.

At San Antonio-based Security Service FCU, "we don't see it to be a huge deal in our markets; we haven't had a lot of demand from our membership as it relates to that," said Charles Goss, EVP and chief lending officer. "I look at market share reports every month and it's just not a big enough piece of the pie right now."

Part of what keeps Security Service away from the leasing market, according to Goss, is a reluctance to deviate from what is already a winning formula.

The CU already holds more than 25% of its market share in auto lending, he said (including not just the CU's Texas membership, but branches and dealership relationships in Utah and Colorado), and the fact that it currently is the No. 1 lender in Colorado, including banks and captives.

Tony Boutel e, CEO of CU Direct Lending and the widely used CUDL network for credit union auto lending, dismissed the idea that CUs should rush into leasing, noting that one out of every five auto loans currently goes to a credit union.

"Is [leasing] something we need to put on our agenda to look at?" he said. "Absolutely. Leasing went from about 24% of al cars financed in 2012 to 28% in 2013, so it's a pretty large percentage, but I do think it's capped. I don't' think it wil go much higher than that."

Boutel e said that CU Direct is looking into a leasing option, "but the other thing credit unions recognize is people that get into that leasing cycle stay in that leasing cycle, and how do you get those members?"

Gen Y Tool

GrooveCar's Jacobson noted that leasing is also an appealing option for Gen Y members finishing col ege and entering early adulthood.

"Now kids coming out of school having their parents cosign for them are leasing cars" rather than buying," he said. Not only do cars general y require hefty down payments, but owners are saddled with debt for several years, and new cars often carry high monthly payments. That's a tough sel for a consumer in his or her early twenties these days, said Jacobson.

"Economical y, it makes sense for the younger generation." EFG Companies' Klees concurred.

"For a younger generation, credit unions are going to have to come out with the compel ing offer," he said. "They're going to have to come out with a tool... that reduces the monthly payment but doesn't force a longer term."