‘Back to the Future’ with Vehicle Leasing – the original ‘usage-based’ model and how it can improve credit union yield


Today, nearly one of every three new vehicles is leased.[1] And thanks to the emergence of the usage-based economy, leasing shows signs of superseding traditional ‘owner-based’ lending models – a trend bolstered by millennials who now represent the largest percentage of vehicle lessors of any age cohort. 

That should come as no surprise. The usage-based model is a perfect fit for a generation just now growing into their credit profiles.   Consider today’s disruptive examples: Rent the Runway for clothing, Metro Mile for insurance, and Netflix for entertainment. All (and more) enable consumers to pay for the use of an asset without committing to ownership.

Ironically, this isn’t a new idea that has moved to the forefront of today’s more innovative business models. Transportation leasing came along in the US during the 1700s for horses, buggies and wagons.[2] Some credit Zollie Frank, a car dealer in Chicago, with inventing a form of car leasing in the 1940s. It grew from there: automakers jumped onboard in 1962[3]  and, by 1970, more than 11,000 car dealers were involved in leasing, with around 1 million vehicles under lease in the United States. 

Despite the growth of leasing with dealers, particularly for vehicle fleets, consumers were slower to adopt the leasing model. When I owned new car dealerships starting in the nineties, the ownership model of vehicle financing was still very much embedded in consumers’ minds. Leasing required a special sales approach. The way we explained it to consumers was very much in a “pay for use” vernacular: “You know that you’d like to keep a car for a certain term – that you keep (vehicles) until the warranty is expired… So why not just pay for the time you use, and not worry about trade-in or warranty expiration?”

The leasing model is gaining steam, though. Vehicle leasing has doubled since 2010, and, today, is very much in the mainstream: five million units are predicted to be leased in 2019 (that’s about $135 billion dollars’ worth!), and the pay for use benefits of leasing no longer need any special explanation, especially to millennials. They embrace the concept, in part because they (and most consumers) manage their finances based on monthly payments. Leasing, then, makes perfect sense, especially as the cost of new vehicles continues[1] to skyrocket to an astonishing $37K on average.[2] Add to that the rapid evolution of vehicle technology (which is helping spike new vehicle costs) and the desire many consumers have to keep on top of the latest technology, and the outlook for leasing looks as robust for the foreseeable future as it does today.  The bottom line is that leasing fits a modern lifestyle trend: a financial and transportation option that prioritizes the experience over ownership. 

And, it’s not just millennials who are embracing leasing and its pay for use benefits. Retiring boomers are also a large slice of the leasing pie, for many of the same reasons that attract younger drivers. In fact, leasing, in our view, represents not only a lifeline in a future of declining car ownership, but a significant boost to businesses dependent on car sales for part of their revenue stream – whether you are the one selling them or the entity providing the financing.

Despite this, the majority of credit unions are not leveraging the opportunity presented by leasing, even though many offer vehicle financing. Vehicle leasing penetration in credit unions is just under 2% — although that percentage encompasses one in six of the top 60 pace-setting credit unions. Our most avid clients increasingly shift their loan portfolios to favor leasing, as the benefits of offering vehicle leasing for credit unions are myriad. In addition to offering a service that will meet the demand of current and future members, vehicle leasing offers a great opportunity to increase membership, offer a more diversified range of services, deepen dealer relationships and, importantly, increase yield.

Since time on books for leases far exceeds that of the average auto loan (the typical 36-month lease stays on the books for 32 to 34 months), and lessees tend to be reliable “A” paper customers, our clients consistently report an average increase in yield of 60-100 basis points (bps) over auto loans as a result of their leasing program. Not only do our clients report an increase in yield, they also report a default rate for leases of only 0.02%. That’s not a typo: 0.02%. For credit unions preparing for the new proposed CECL guidelines, it’s likely they’ll need to set aside less in reserves than credit unions focused solely on traditional auto loans.

So the real question is this: If vehicle leasing is the perfect product to augment a credit union’s existing lending portfolio – a lower risk, higher return product that appeals to high credit score customers, can increase membership, draws in customers they need most, and offers a competitive advantage in the market – why aren’t more credit unions jumping in?

Awareness is a key factor, as are legacy roadblocks that no longer exist. For example, some credit unions that offered leasing in the past were burned when volatile vehicle values, coupled with rudimentary residual assessments, created logistical challenges and severe financial risk. Leasing companies in previous decades lacked the kind of sophisticated analytics available today to mitigate risk. Fortunately, so much has changed in the last decade and today’s technology, data, and AI enable the calculation of residual values that are far more accurately predictive than ever before. In fact, because of the accuracy of our residuals and the protections we have in place for our clients, only one client has ever experienced a loss, and that was in 2008. None have suffered a loss in over a decade.

Another roadblock is the perceived complexity of implementing a leasing program. While it’s true there are many moving parts to managing a leasing program, our entire business model is centered on making the process as seamless as possible for our clients. At CULA we manage everything from compliance and residual value setting to tax remittance and vehicle remarketing. Credit unions are in control of setting rates and establishing lending criteria, as well as collecting payments, just like they do on any other loan product. With our hands-on customer service team and our proprietary lease management system, credit unions can open up a new, higher-yield line of business while gaining new members.

What’s old is not only new again, but it is right in the sweet spot of an economy that’s driven by an active new generation of buyers, and that has seen radical changes pushed by technology and usage-based economic models.  The argument for credit union adoption is compelling and, today, the opportunity to implement it easily and with low risk, is also there.

So, while there is plenty of buzz about each new model that seeks to disrupt the automotive industry, the one that offers the best defense against the decline of vehicle ownership (and auto loans) – and great benefits for credit unions – has been around since the 1940s: vehicle leasing. 

Ken Sopp is President of Credit Union Leasing of America (CULA), the leader in indirect vehicle leasing for credit unions, offering a solution that helps credit unions increase yield, diversify their portfolios, capture additional business from current members and increase membership. In his previous role with the Hankey Group, Sopp was instrumental in building and developing Midway Fleet Leasing and HFCA, both successful vehicle lease and finance companies in the Los Angeles area. A previous owner of multiple automotive dealerships, Ken has worked in all areas of dealership operations, with a particular emphasis on fleet leasing and financing. Visit to learn more.[1]


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