The last ALG book period of the year represents particularly good opportunities. Usually, large volumes of rental vehicles coming into the fall market, coupled with a model year change and residuals that remain somewhat constant, provides some compelling payments on certain vehicles. This year, the volumes of vehicles generally aren’t present as in previous years, but all the other elements of compelling deals are. Of course, 2009 pre-owned vehicles at wholesale can be purchased for substantially less than original invoice.

The following examples are approximate and meant only as a starting point. Use your own knowledge of the market and inventory sources, AND your finance calculator and/or RouteOne to run your own payments. These are only examples. Nothing draws traffic better than a compelling payment!

The examples are based on approximately $2500 Gross Profit and a 6% finance rate. TT&L is not calculated. Miles are average and purchase values are based on auction averages. These examples were selected for more than their payments. They are vehicles that are available for purchase based on previous week auction transaction frequency. To keep things equal, all calculations are with zero down payment or trade equity. Annual allowable miles is 12000. Watch your mileage bands when buying!

Inventory is sometimes hard to get these days. Enterprise, Dollar Thrifty, and OpenLane are excellent inventory sources you might not have used. Let me know if you need contact information.


YR/MAKE/Model Recent Sales Miles MMR DS36/mo DS48/mo


2009 Cadillac DTS 118 23260 $28,000 $661 $563


2009 Chevy HHR LT 224 20900 $10800 $225 $205


2009 Chevy Impala V6 LT 750 24500 $13000 $294 $260

2009 Chevy Malibu 4 cyl LT 179 26900 $13000 $243 $231

2009 Kia Sportage V6 4WD LX 50 21000 $15000 $358 $308

2009 Chrysler Sebring 4cyl 47 28700 $10700 $251 $223

2009 Ford Edge FWD SE V6 70 17700 $21000 $459 $395

2009 Ford Fusion 4cyl SE 35 16000 $14700 $329 $290

2009 Lincoln MKS 128 17900 $28500 $507. $472.

2009 Lincoln Town Car 267 17000 $25700 $575 $510

2009 Nissan Altima S 88 26900 $14300 $247 $232

2009 Nissan Murano AWD S 107 19800 $19800 $337 $312

Important to know about residual based financing is the fact that money down or trade equity has a more positive effect on monthly payment than on conventional financing, especially for shorter terms. Take the 2009 Nissan Murano example above.

24 mo payment with no down - $407.00

24 month payment with $5000 Down - $177.00

If you think 60 - 84 month terms are in your best interest, keep doing it. If you think shortening term and keeping control of your buyer to do business with them more often might recession proof your dealership for the future, then residual based finance is your answer!

Why is GMAC losing so much money? Residual losses from before GM's BK? Repos and high default severity? Floor plan and cap loan losses from dealers going out of business?

In time, GMAC's new Ally Bank could attract enough deposits to fuel more lending but there probably has not been enough time for this to gain traction. No ABS money available to them? What is going on? I haven't figured this one out yet. This money is or isn't coming from TARP or TALF?

I'm curious whether the Chrysler loan portfolio that GM has inherited is any different in performance from the GM one? Of course we now know why GMAC was so profitable a few
years back, riding the bubble up ... and now the fall once it's broken.

It may have to do with priorities - jobs over healthcare resonates. There certainly has not been the White House push on the latter that meaningful reform would require. Instead, we may have another patch, as happened with Medicare and Medicaid some decades back.

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

http://www.autofinancialgroup.com/PAGES/about_drivingsense.htm

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.

GM has shed a bunch of Cadillac dealers. I believe the state of Iowa only has 2 or 3 left. John McEleney, NADA president lost 2 Cadillac stores. In the past Cadillac dealers stocked a representative sampling of new Caddys and focused on late model pre-owned. Off lease and daily rental Cads made for gross profits much higher than selling new ones.

I suspect that these terminated Cadillac dealers will still want to stock pre-owned Cads but won't be able to buy them at the closed sales. In addition, GM might try to back off their fleet sales to bolster their resale values, which is their stated goal. The big question: Will the executive compensation and bonuses drive restraint or push for volume and market share above all else? The latter is what got them in trouble in the first place. But the bottom line is I suspect we will see Caddy resale prices firm up remarkably, at least for a while.

We know OEMs became sold on leasing when Eustice Wolfington developed the "Half a Car" concept and sold it to Ford. Of course Ford marketing the concept as Red Carpet Lease and Customer Option Plan for their balloon program, which worked better in states where the sales tax was charged upfront. The idea of cycling customers more often through short term leases made a lot of sense. So did the depreciation credits Ford received because the title stayed in the OEM's name. These depreciation credits were a lot more helpful when the OEM was profitable, not so much during extended periods of loss. There is a limit to "loss carry forwards" although I don't know all the details on the subject. I know the IRS disallowed substantial loss carry forwards for GM a few years ago and they posted a huge loss as a result.

After Ford's initial success, all the OEMs sprang to get involved in short term leasing to realize the inherent advantages. Unfortunately, the domestic OEMs were also working at the same time to dismantle their own residuals through huge fleet and daily rental sales. The residual losses they took overwhelmed their depreciation credits and caused them to become more conservative on residuals and extend the lease terms from 24 months to 30 and then 36 months. The Imports had much better results because their residuals stayed high because they managed their overall business better. The Domestics tried to keep things going but were double whammied by residual losses when fuel prices spiked and the Asset Backed Securities market dissolved almost overnight.

What I never understood was why independent banks would try to compete with the OEMs with new vehicle leasing when the domestic manufacturers seemingly had their own death wish going on. To me it made more sense for independent banks to engage in pre-owned leasing, but instead they tried to carve out a niche by offering programs for longer terms. But the same factors caused the independent banks to bail out, although US Bank has stayed in the game. They will now handle leasing for GM in 5 northeastern states. There are many credit unions still actively engaged in leasing, but they are doing mostly balloon financing. They can be conservative with residuals these days and pick their spots.

I mostly agree with Mr. Patel but I'm not sure he understands the total logic behind why OEMs have subsidized leasing. And there is no doubt that the domestic OEMs look at the imports continued success with short term leasing and realize the market share they are losing to them. The subject is somewhat academic at this point as the domestic OEMs don't have the money to get back in the leasing game anyway. Limitations have been put on Chrysler and GM by the Task Force and provisions of the TALF money they have received. But the allure to get back in and protect market share is strong!

There are many things driving used vehicle values. Due to depleted inventories, OEMs are offering incentives at both retail and wholesale at historical lows. I don't see a bursting balloon in pre-owned values given the lack of lease and rental returns we will see in the next few years. BUT if the OEMs over produce and feel they need to offer huge rebates and/or trunk money, it could put downward pressure on pre-owned prices.

The Treasury Department plans to inject almost $6 billion into the new GMAC. The capital infusion will be in exchange for preferred stock. But regardless of your position on government intervention, it cannot be argued that it puts Ford - who has yet to accept any government handouts - at a severe disadvantage.

Nevertheless, the lone Detroit hold out announced today they made in excess of $1 billion in profit in the most recent quarter buoyed largely by strong sales in China.

In the 1950’s 40,000 dealers serviced 50 million Detroit branded cars. With the recent Auto Task Force cuts, 9,600 dealers are expected to service more than 150 million Detroit brand cars. Hard to believe.