Credit unions, long a good source for car loans, are starting to make a comeback in vehicle leasing, hoping their track records of friendly service and low rates will help them build up an extra line of business. That's good news for consumers and business people. As these institutions tiptoe back into the market, they are providing customers with another option for financing a vehicle after months of tough going for borrowers and lenders alike.
Between 2002 and 2004, many credit unions abandoned leasing after being burned in cutthroat competition with banks, specialized leasing companies and the automakers' own financial units. It didn't help that the resale values of returned lease vehicles plummeted before and during the financial crisis of 2008. That robbed credit unions and other lease providers of the opportunity to recoup their full investment in a vehicle.
It has tended to be the larger credit unions that have stayed with leasing through the ups and downs of the economy, and they usually have leasing experts in-house or under contract, said Jim Henderson, senior vice president at Educators Credit Union in southeastern Wisconsin. His institution has been in the leasing business continuously since 2002.
But now leasing is piquing the interest of other credit unions and their service providers again. For example, New York-based CU Xpress Lease, which has developed a leasing system for credit unions, sees opportunities beyond its home turf and is expanding into New Jersey, Pennsylvania, Michigan, Florida and California.
"Credit unions especially are looking at any source they can to get some excitement going, and leasing is slowly creeping back," said John Kurtz of the Texas Credit Union League. For many credit unions, leasing is the line of business that could transform them into a full-service lender.
Fans of credit unions note that they are nonprofit organizations with low costs of operation. They tend to give their members straightforward answers on interest rates and other details, making it easy for them to shop for the best deal, according to Kurtz. "The leasing companies don't quote interest rates, but credit unions do," he said.
Credit unions are often willing to be creative, tailoring the lease duration and monthly payment to an owner's specific driving habits, their proponents say. Greylock Federal Credit Union in North Adams, Mass., is one example. It has developed a car leasing program that doesn't require a down payment and permits customers to buy the vehicle at any time -- or walk away from a lease after paying for wear and tear.
Through its FairLease Program, the Dallas-based Credit Union of Texas allows customers to make small down payments and to set their own mileage limits. If the driver commits to a low annual mileage in the lease, perhaps 8,500 miles instead of the more typical 12,500 miles, that would translate into a lower the monthly payment.
Credit union customers have more control over the leasing process, too, Kurtz said. "Instead of going to a leasing company and telling them what you want, you have an opportunity to go out and find the car, and then tell the credit union and say, 'I am interesting in leasing this.'"
What They Can't Do
The credit unions now active in leasing are known to be tough competitors on leasing rates and in customer service. But they aren't likely to beat automakers' advertised lease specials, such as $149 a month on a compact like the Subaru Impreza or a $199 on a midsize car like the Nissan Altima. Automakers routinely subsidize these deals to move excess inventory or gain market share.
Another rub is that leasing has yet to rebound at credit unions across the country. As a result, consumers may have to knock at the door of quite a few of these institutions to find a leasing program. In the end, some may not find one.
That's something that David Jacobson intends to change. He launched CU Xpress Lease on Long Island about four years ago to make credit union leasing available to more consumers through dealerships. "We are working with about 25 credit unions who are interested in putting this program together," said Jacobson.
In Jacobson's model, CU Xpress assumes the risk of a poorer-than-expected resale value when a vehicle is turned in, and the credit union provides the financing and assures that lessee will indeed make the payments. CU Xpress's role takes away a major source of risk for the credit unions, he said.
It was the free-fall in resale values that knocked the wind out of the leasing business. Companies active in the field had a hard time recovering the expense of buying the vehicle in the first place. Gas-guzzling vehicles were a major culprit. When the one-two punch of soaring gas prices and then recession hit the market, the resale value of large cars and SUVs plummeted. As a result, many leasing organizations took a bath financially when they tried to move returned cars into the market. Jacobson said CU Xpress gets around the problem by "staying with cars that are good for resale."
"The choice of models that we are putting leases on is very well thought-out," he said. For one thing, CU Express makes sure the market isn't going to be flooded with a particular model when its leases are up. For another, it avoids direct competition with manufacturers' specials.
Honda, for example, routinely has special leases for a variety of its vehicles, he notes. "But they always leave out a few vehicles that they do not support. Maybe it's the Pilot. Maybe it's the six-cylinder Honda Accord instead of the four-cylinder. We will expose these niches that aren't being covered by the manufacturer," he said.
Jacobson says CU Xpress also takes out insurance to cover the company if resale values don't live up to expectations. And his partner, Fusion Auto Finance of Hurst, Texas, is an expert at remarketing returned vehicles, he said. That assures that CU Express will get the resale values it needs.
Think Before You Lease
No matter who provides them, auto leases aren't the best option for most customers. Anyone who normally keeps a car for five or more years is probably not a good candidate for one, Henderson says. "But if a person normally keeps a car two or three years, a lease is an opportunity to save money, and sometimes to reduce risk," he said.Auto leases can certainly be a good alternative for business people who like to drive new vehicles and who may have to squire clients around town. Theoretically, with a lease you only pay the true cost of ownership over the two or three years you drive the car. So the consumer can end up paying as much as 25 to 40 percent less per month, but in return has to accept annual mileage restrictions, often 12,500 to 15,000 miles. And the lessee also has to pay steep per-mile penalties if the limit is exceeded. Another consideration is that a vehicle will normally be under warranty during the lease period. And leasing, its proponents like to say, saves lessees from the ultimate fate of virtually all conventional car owners: It keeps them out of the used car business at the end of their ownership cycle.