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Leasing option expands to powersports – August 14, 2006

August 14, 2006
Filed under Features

Leasing, a popular financing option in the auto industry, has yet to reach the same level of interest in the powersports industry. That could change as rising interest rates figure to make consumers and dealers look more closely at the potentially lower monthly payments that leasing offers.
Less than 1 percent of the new bike buyers surveyed in the recent J.D. Power & Associates survey used leasing to finance their new motorcycles in 2005. That minute number isn’t surprising to Ed Menken, vice president of marketing for Sparta Commercial Services, Inc., a full-service financial services company.
Sparta, as far as Menken knows, is the only financial institution offering the option to powersports dealers. And because Sparta works directly with dealers, the company does not advertise to consumers.
“Even the dealers who love us and give us a lot of business, it’s a little bit of an uphill struggle to get them familiar with leasing,” Menken said from his Houston office. “The exception with the rule is when you’ve got people coming out of the car business. Because if they come out of the car business, they know leasing.”
Of course, the main difference between leasing and the traditional installment financing plan is the financial institution, in this case Sparta, owns the vehicle, not the consumer.
“From a dealer’s point of view, it’s no different,” Menken said, comparing leasing to installment financing, “because we’re buying the unit from them no matter what.”
Here’s a brief look at Sparta’s leasing program, called the Flex Lease:

  • Consumers are offered two-, three-, four- and five-year leases. The key difference between the options is the amount of money kept out of the payment equation, which is called the residual. For five years, the residual is 40 percent on most major brands, meaning a consumer’s monthly payment for a $10,000 bike would be based off $6,000 plus interest. The remaining $4,000 is the residual. The residual percentage increases as the time of the lease decreases. So a four-year lease’s residual is 45 percent. a 3-year lease is 50 percent and a 2-year lease can be 55-60 percent. There can be a change in the residual’s percentage depending on the vehicle.
  • So what happens to the residual after the lease is up? The consumer has two choices: they can pay the remaining amount to gain ownership of the vehicle or they can re-lease the vehicle and own it at the end of the second term.
  • What about interest levels? Menken said the interest rate for leasing, which is legally referred to as the “money factor,” is the same percentage as an installment option. Also like traditional financing, a consumer’s interest rate for the lease will greatly depend on their credit rating.
  • Can a consumer terminate their lease? Yes. In fact, Sparta has a program called “early upgrades” that encourages consumers to look for a new vehicle, an upgrade, after they’ve established a good credit history with Sparta and a certain time has passed on their lease. For the five-year plan, consumers can upgrade after their third year. If that’s done, there’s no penalty to the consumer. “That’s unheard of in the car business,” Menken said. “In the car leasing business, it doesn’t matter whether you run a two-, three-, four-, five-year lease, if you want to get out of it early, it’s going to cost you a stiff penalty.” With Sparta’s plan, consumers can only upgrade with the dealer they received their original lease from.
  • What about consumers with bad credit? Where consumers fall in the credit ratings will dictate how much down payment they’ll need and how much interest they’re going to pay. But the leasing program is not set aside only for consumers with good credit. In fact, Victory of South Florida, Pompano Beach, Fla., uses leasing as a second or third option for customers with poor credit.
    “Most people prefer to do an install and end up owning the bike outright,” said Walt Jakobowski, the owner of Victory of South Florida. But, the leasing program lets them “establish a credit history again, which they wouldn’t have gotten with a Tier 1 or Tier 2 lender and gets them back on the road again.”
    Jakobowski said the dealership has used the leasing program since the beginning of this year. “We haven’t heard any negatives from people who have used the program,” he said. “It certainly has allowed them to get into a bike when they otherwise wouldn’t have been able to do it.”
    Kirk Dendy, owner of South Haven Kawasaki Yamaha, South Haven, Miss., uses the leasing program as a “last resort” to get customers approved for financing.
    “We’ve gotten numerous approved deals that we otherwise would have to send packing,” said Dendy, who has used the program for a couple of months. “I haven’t been able to convert 100 percent of the approvals into actual sales, but we’ve been able to get a rather high percentage of them.”
    Dendy said the main sticking point for customers who have been approved but are hesitant to take the lease is the residual payment at the end. To alleviate that concern, Dendy advises customers put 10 percent of their monthly payment into a savings account. At the end of the term of the lease, that saving account would be large enough to make the residual payment easier to pay off.
    “If they decide not to keep the vehicle,” Dendy said, “I as the dealer get the first right of refusal (on the used vehicle). So it’s a pretty good deal for the dealer actually.”
    The leasing program also is being used at Southern Honda Powersports, Chattanooga, Tenn., one of the nation’s largest Honda dealers in terms of units sold per year.
    “We started out using it as a bad credit option,” said Lisa Williams, Southern Honda’s finance manager, “but then we found that it has benefits for good credit people as well as bad credit people.”
    The lease program has to be sold to consumers, who are largely unaware of the option, Williams said. “People are naturally leery of something they don’t understand. But once you sit down and explain it to them and show the benefits of it, they like it.”

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