Used car leasing is on a path to becoming a $6B market.

 

The rising interest in used car leasing is mainly due to two major trends; the steadily increasing number of good quality used vehicles and the consumer demand for solid and good performing cars at a reasonable price. Apart from these trends, there are two major benefits that affect the market's growth: the vehicle leasing providers get a new profitable revenue stream and the consumer gets access to high-quality cars at reasonable prices. It is hard to stay away from these benefits!

It is then no surprise then that used car leasing is on the journey to becoming a 6.4 billion market in Europe by 2030. Until now fleet car leasing was the dominating sector but now the dedicated remarketing divisions are being set up by the top vehicle leasing providers of the region to sell their used, off-lease cars directly to customers. This is a deviation from the conventional style of the past where the lease vehicles were sold indirectly through business-to-business channels like brokers or auction houses. Corporate car leases are dominating the corporate world now.

 ALD Automotive offered customers car leasing services in the form of a B2C channel which allowed customers to buy or lease its off-lease vehicles. LeasePlan kick-started the trend in late 2017 and Arval, Alphabet, and PSA followed the path of introducing similar offers in various countries like Belgium, France, Germany, the Netherlands, Finland and the U.K.

 These traditional leasing heavyweights are not the only ones who are exploring the market. The market remains open and full of opportunities for all. Technology start-ups and small independent leasing companies are exploring this space efficiently. They source quality off-lease vehicles from fleet leasing companies to customers.

 The emergence of a new generation of vehicles that perform better and are built to have greater durability contributed tremendously to the used car leasing market. This build quality of new vehicles is reflected in their warranty periods. A decade ago the warranty terms lasted only 2-3 years. If we look at today's vehicles, the warranty terms stretch up to 7 years. This extended life cycle of these new vehicles is a great opportunity for companies. They can capitalize on this greater life cycle through second leases. 

 Regulation Tips The Balance

 Leasing a used car with features similar to a new car costs much less today in an operational leasing format. Using a second lease car which is similar to a new car at a much lower price is a lucrative benefit but it does not stop there. The used car lease is not exempted from the benefits you get from an operational lease; which means, maintenance covers, 24x7 roadside assistance, etc. are still available for customers. Remarketing hassles can be avoided with the inclusion of residual cover. Even the most serious skeptic42 will be convinced when they get to know that a replacement car will be provided if the car one is using is facing prolonged maintenance issues. 

The monthly lease rates for the operational lease of a used car are lower by 34% in comparison to the same new car in Western and Northern Europe. However, the compared price difference stays at about as low as 15% for used cars in Southern and Central Eastern Europe.

In those regions where the monthly lease rates are not significantly different, the buyers are choosing newer vehicles than a second lease. However, the overall total cost of ownership of new cars faces threats with tightening emission norms and rising car taxes. This can widen the price gap between new and used vehicles. This can break the current trend and work in favor of used car leasing.

Treading Past Challenges

The common question consumers have is about the residual value estimation and high maintenance risks. This is causing doubt in consumers' minds about choosing used car leasing. But the used car leasing providers already tackling the issue by carefully handling the process of selection of their vehicle pool. This ensures the quality of vehicles customers drive home.

 The ideal vehicle for second leasing are the vehicles that have been chosen from leasing contracts which must be aged less than 4 years and demo vehicles from dealerships are also an ideal choice. These vehicles are perfect for second leasing because they have clear records related to usage, repair, mileage, and accidents.

 Expanding the customer base is another challenge leasing providers have to face. As a solution leasing providers have introduced many inventive responses. But one particular thing can widen the customer base. These are flexible contracts; now imagine if one could second lease a car for short durations (3-6 months) with an option to swap the vehicle once the lease period ends.

 The administrative effort involved is another issue and since it is higher, the profit margin of the business is low. The lower administrative effort is the key for corporate leasing to generate the same amount of revenue.

 But the world has gone digital, and companies are using it to their advantage. They have already adapted to the change by providing robust online quote generators, e-contracts and online credit checks. These reduce the administrative burden and streamline processing times.

 For example, ALD Automotive hold a considerable percentage of its business online. Almost all processes of car leasing can be done online.

 This is an evolving space and companies are adapting to it in their way. For instance, the large Belgian car dealership D’Ieteren Auto launched a start-up called 'Lizy' in 2018. Belgium successfully welcomed this flexible leasing of used cars. The CEO Sam Heymans indicated in an interview that Lizy has been able to maintain quality standards by sourcing off-lease vehicles from parent company D’Ieteren Lease. Lizy manages the digital platform to drive customers on board while D’Ieteren manages the vehicle contracts. This helps to keep operational costs rationalized and keep the prices competitive. SMEs and entrepreneurs are the target customers and flexible contracts have proven to meet their needs.

 Residual value estimation is another hurdle to face in this. In certain parts of Europe, the emission laws are very strict. This makes it even harder to predict residual values adequately. This carries the potential to discourage service providers from offering operational leases for used cars. By the end, the car will be 6-8 years old and the responsibility of disposing of these after the termination of the second lease term falls into the hands of the service provider

 However, over the next 2-3 years there is a strong market potential for electric vehicles. Also, the service providers are adopting new strategies to overcome challenges. For instance, the challenge of weak domestic demand for used car leasing of certain models is overcome by leasing them in countries with more relaxed car policies. Bil I Nord is a large dealer in the Nordic region and they import used Volvo cars from Sweden. They are then leased off to individuals in Norway.

B2B Isn’t Going Anywhere

 By strengthening their dedicated remarketing divisions, the global leasing companies will keep on improving their B2C channels. Leasing companies can predict residual value and maintenance concerns since they have access to SMR (service, maintenance & repair) records of their off-lease vehicles, and this will inform the expanding operational leasing portfolios of ALD's Origin, LeasePlan's Car Next, FCA's Clicker and PSA's.

 But leasing companies are simultaneously expanding their partnerships with online marketplaces and auction houses. And the leasing companies' lack of local expertise in most markets makes it unlikely that B2B remarketing channels will face any challenges.

 A new and exciting revenue stream for fleet leasing companies has arrived with the introduction of used car leasing. But what decides the future of this is the profit it makes compared to B2B remarketing.