Car buying can be a tough process, especially from a financing perspective. Luckily a variety of options exist for potential consumers. One of the most popular options is leasing.
According to a 2013 study conducted by Experian Automotive, leasing accounted for over 28 percent of all new car financing. The current automotive lease exists like this: the customer will borrow the difference between what the car is currently worth versus its predicted residual value, or the value that the car is expected to have at the end of the lease term. This allows monthly payments to be lower than other traditional loans. Also, as an added incentive, the higher the potential residual value a car is expected to have the less a customer has to borrow.
However, automotive leasing didn’t always exist in this form. Back in the early 1960s, a young auto dealer named Eustace Wolfington had an idea. Wolfington, who worked at a Chevrolet dealer, was trying to sell a new Impala to his friend. The Impala was $500 more than his friend wanted to pay, but Wolfington stressed that his friend would get $1,000 more when he traded it in. Unfortunately, his friend couldn’t afford the leasing payments so he passed on the deal.
During the 1960s, leasing was limited to a few private companies who only dealt with businesses and not the public. The finance companies hadn’t even thought about trying to deal directly with consumers.
In addition, customers had been accustomed to buying a new car every two years, but due to the rising costs of automobiles, customers often financed their cars for four years or more. When they did buy a car, due to the price, they often bought stripped down models lacking in luxury features such as air-conditioning. Those models were instead sold to auto fleets that could afford the higher payments.
Wolfington had the idea to reduce the consumer lifecycle from four years back down to two. But he first had to reduce the costs of financing a new car. His concept was to have the customer finance or lease half of the vehicle’s price, then after two years the dealer would take the car back and resell the vehicle for the depreciated price.
In order to do this he needed data, so he conducted a study going back 20 years which detailed the depreciation value for every two-year car built at that time. Showing, in essence, the stability of the used car business.
He took his concept and his study to a bank, where he convinced them to participate so long as he assumed the resale risk. Shortly after, he had over 50 banks that signed up for the program. Later that year, he published the industries first leasing guide based on his study.
In addition to developing the first modern automotive leasing structure, Wolfington also created the first lease renewal program because he found customers would return the car to the dealership after the lease term, and then go somewhere else for their next purchase.
Wolfington’s concepts were adopted by Ford Motor Co. in the 1980s and later by the industry as a whole, which developed into the current auto lease model and renewal programs used by dealers across the country.
For more perspective on how Wolfington developed the modern auto leasing structure check out the video below:
[Sources: ALR, Automotive Fleet, Video]