Credit Unions and Residual Based Finance

There are about 250 credit unions actively marketing residual based financing using a residual guarantee program from Automotive Financial Group out of Houston TX.

These credit unions are doing balloon type contracts instead of leases because their non profit status negates any advantage associated with the depreciation credits. There's a whole story to be told on credit unions's role in helping prop up the industry and dealers in general. They don't depend on the ABS market. Dealers able to finance deals through credit unions have a distinct advantage over those who don't. The balloon financing product has another benefit. If the consumer decides to buy out their vehicle at the end of the contract term they do not have to pay sales tax again as the title has been in their name from the beginning. With a lease, the title transfers from the lessor to the lessee/buyer of the lessor buys out the terminated lease vehicle and sales tax is due on the purchase amount.

Regarding the domestic OEMS: I have a lot of theories about why they have done what they have done. If an OEM puts a lease or balloon on the street with an over optimistic residual, they suspect they will take a "hit" at lease or balloon termination. But if they offer a big rebate today, the "hit" is known and comes off their books immediately. Why not "kick the can down the road" and subvent a short term residual that will cycle the customer more often than a rebate coupled with a long term finance contract? Goodness knows the domestic customer who takes a rebate and finances for 72 plus months will probably be too upside down after 3 years to trade, whereas the chances are much better to do business after 3 years with the lease customer who's short term lease terminates.

Imagine you are the new brand manager of Pontiac a few years ago. You know you need to keep production going. You also know you are having to live with the residual "hits" for vehicles put on the street by your predecessor. You will have to put at least as many "deferred loss" (short term residual based deals with overly optimistic lease end value) deals on the books now to offset the losses your division is taking from the previous regime's deals. But when GMAC/Cerberus hit the wall, the losses piled up with no current offset.

The short term leases OEMs advertise always involve trade equity and/or cash down. One a short term lease or balloon, each $1000. of capital reduction lowers the monthly payment by $45. - $50. The same $1000. down only lowers a long term finance payment about $20. Selling vehicles on 72 plus finance contracts is a losing strategy for the domestics in the face of their import competitors using their higher resale values to do shorter term leases and balloons and cycling buyers more often. This translates directly into incremental market share. Its all about resale value which is driven not only by quality perception but by whether or not an OEM floods the market with fleet sales. And now I see Ford is pushing Taurus as a police cruiser. I frankly don't think they have learned their lesson.