In order to understand how leasing came about (from a grassroots perspective) let’s take a trip back to the early days of the auto business. Henry Ford who was not the first automobile manufacturer but for sure was the most important and innovative manufacturer, understood that if he paid his workers well they would be able to buy one of the cars they were building. Other industries now had to compete for skilled workers by matching the wages paid to Ford workers and before long the middle class developed.
In those days the saying was “you can have any colour of car that you want as long as it was black”
Dealerships sprung up across the country replacing stables. Entrepreneurs touted the new “horseless carriage”. Roads were not paved and shouts of “get a horse” were heard by car drivers blocking traffic out of gas or stuck in the mud. But, one car at a time, the automobile replaced the horse and buggy.
Dealerships were small and inventory consisted of one or two cars. Manufacturers gave dealers no assistance in the way of subsidized financing or floor plans. As a result, most cars were ordered for a delivery in the future which reduced the need for large inventories but clearly limited sales volumes.
By the end of the Second World War the auto industry was in full flight. Servicemen came home with a new sense of optimism and everyone wanted a new car.
In order to purchase a car you had to cash in your savings but soon the banks began to look at car loans as a new way to bolster their bottom line and these loans became a large part of their business. Soon the auto manufactures got into the business of offering loans and eventually became competitors of the bank. This worked well for the car business. The automakers wanted brand loyalty and financing provide that catalyst. If they could develop purchasers into “Ford Guys” or “GM Guys” or “Chrysler Guys” they could count on the purchaser coming back for his new car again and again.
By offering financing at the dealership, this provided more opportunity to close more deals today and more dealer profit and more orders for new cars to the factory.
As business developed manufacturers offered their dealers’ special financing on current inventory(s), known as floor plans and as a result dealerships grew in size to accommadate the new inventory of cars. More choice and models….dealerships began to realize that (at the time), the more vehicles that you have in stock, the opportunity to sell more new cars).
As the price of new cars increased the auto companies were looking for new ways to market their products while ensuring affordability. Enter the lease.
The vehicle lease was a new way of financing cars that recognized that vehicles had a value and a market 2 to 4 years down the road. The finance company would determine the residual (future value) of the vehicle at the end of the lease and the financing would then be calculated on the difference between the cost of the vehicle new and the value of the vehicle at the end of the lease. Thus the payments were based on the difference between the starting (sale) price and the ending residual value. For example, if the final sale price of a vehicle was $25,000.00 and at the end of the lease was projected to be worth $13,000.00; the lease payment would be based on the $12,000.00 difference, plus the interest rate to carry the full value of the car and the length (term) of the lease.
As the price of new vehicles increased year after year, leasing became a very popular method to finance a car. As the American auto industry struggled to compete against the imports, they used subsidized leasing rates to assist in the marketing (and pricing) of their cars. 0% financing became “expected” and residuals (future values) became over inflated caused significant disposal losses for the factory leasing companies.
Today, subsidized leasing has been temporarily suspended (by a couple of factory leasing companies) while the credit crisis sorts itself out. This temporary suspension has caused several leasing customers to reconsider their automobile choices which does not help the business numbers for those specific automakers any easier.
The car industry is going through tough times but the love of a car has not changed and the car business will come out of this stronger than ever. New management will come in and leases will be the norm again……but that is another topic for another Leasebusters Lease-Blog.
Thank you for reading this first segment of my Leasebusters Lease-Blog. We at Leasebusters encourage you to make your comments and we will publish your thoughts and continue these informative segments based on your participation and encouragement.
Happy motoring – leasing – financing – owning and enjoying…..
Cheryl Paul
Sales Analyst |