NASHVILLE - To lease or not to lease?

That was a question much on the minds of auto lenders gathered at a convention this week in the Tennessee capital. The growing popularity of leasing made it the dominant topic at the Consumer Bankers Association's 1995 Automobile Conference and Trade Show.

"Everybody in this room is thinking about leasing," said Wells Fargo Bank executive vice president Richard T. Schliesmann. "And the reason we are is there's a lot of money involved in this business."

But Mr. Schliesmann and other speakers also warned of pitfalls ahead in the leasing game, including heightened competition, thinning margins, a growing glut of used cars, and excessive "residual" or end-of-term values for leased cars.

"We believe you can take this too far," said Larry M. Raney, manager of retail leasing for General Motors Corp.'s Chevrolet division. "At some point, the cost of marketing vehicles through retail leasing will outweigh the benefits that you gain from it."

Many bankers attending the sessions at Nashville's Opryland Hotel clearly felt the same way.

Two were overheard chatting during a presentation on residual value risk.

"Man, a lot of people are getting into this business," one man said.

"Yeah," said the other. "It's scary, isn't it?"

The growing popularity of leasing as an auto financing technique was confirmed by results of the trade group's 1995 Automobile Finance Study, which was released at the convention on Tuesday. The dollar volume of leases among the association's sample of 48 banks and finance companies soared 58% last year, after a 39% increase in 1993.

More traditional indirect auto lending, by contrast, decreased nearly 2% in 1994, according to the study, which tracks only sales handled by dealers.

Leasing now accounts for one fourth of new-car sales. Several experts at the convention predicted leasing would achieve a 35% to 40% market share within three to four years.

The convention itself has come full circle in the 15 years since the first one, a forum for member banks to discuss leasing issues. "That was eclipsed later by direct lending and dealer relationships," said Joe Belew, the trade group's president. "But now leasing is coming back in a very noticeable tidal wave."

William E. Odom, chairman of Ford Motor Credit Co., pinpointed the appeal of leasing in his speech. "Customers," Mr. Odom said, "are able to drive more car for the same monthly payment."

Ford, which helped lead the charge on leasing back in the 1980s, has done well by its recent growth. According to Mr. Odom, leasing increased from 6% of Ford's retail sales in 1991 to 20% today.

Mr. Odom said leasing helps build brand loyalty. "Customers who are pleased with a two-year-old vehicle are likely to lease again," he said. "It's not unlike banks' efforts to cross-sell customers."

But Chevrolet's Mr. Ranet also described leasing as a "prisoner's dilemma" for the manufacturers, in that they find themselves trapped in a business with shrinking profit margins. Internal General Motors studies indicate the company could lose 40% of its luxury car sales if it abandoned leasing, he said.

Bankers also fret about shrinking profits. Mr. Schliesmann said the spread on Wells Fargo's leasing portfolio has fallen from about 2.3% when he began managing it in 1988 to less than 1% this year.

Because of increased competition, banks and other lessors are waiving fees and inflating the residual value of the vehicles that customers turn in at the end of the lease, according to Mr. Schliesmann.

The latter practice is particularly dangerous, because the effects remain hidden for some time.

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