Survival tactics reign on depressed car-lease market

In the present climate, leasing market observers warn that it’s important to determine from the small print of a leasing contract any possibly misleading information about the gross lending rate (GLR) of a loan. In addition, they advise that while car buyers can find cheap used cars on the websites of car leasing companies, they’re better off having a car checked by a mechanic prior to purchase. Some such cars, they note, have been returned because of defaulted leasing contracts, and previous defaulters have been known to leave behind a few nasty surprises.

Tibor Pap, head of the Budapest office of VB Financial Leasing Rt, part of the Volksbank Leasing Group, says new car sales have decreased by nearly 20%, while sales of used cars have dropped even further. As a consequence, he explains, car dealers, financing firms and insurance companies have entered a kind of cutthroat, profit margin-wiping level of competition – just to reach sales targets and keep market shares.

As Pap describes it, carmakers are supporting their primary dealers and bankrolling loss-making marketing schemes in order to “buy some of the market.” He adds, however, that the consumer pays the price in the end – which explains why used car prices are still significantly higher than in the EU.

Meanwhile, car dealers say that it is the 6%–8% commissions paid by leasing firms and the 10%–12% by insurance companies that keep them on the market. Margins on car sales are so low, dealers admit, that they can’t make money. And press reports say that client acquisition costs of leasing firms grew last year by 30%.

At the same time, it’s hard to say whether the presently favorable circumstances for car buyers will remain.

“It’s difficult to return to higher interest rates when clients have got used to 3%–5% gross lending rates,” says Zsolt Horváth, head of car financing at HVB Leasing Hungary Rt.

“The market will normalize in two or three years’ time,” says Péter Köntös, CEO of Merkantil Bank Rt, “and GLRs will return to normal market levels.”


Hidden costs


For the time being, carmakers and leasing firms are bearing the losses, while customers can strike much better deals than two years ago, when car sales grew by 20% annually.

More than 90% of car leasing contracts are denominated in Swiss francs, because of Switzerland’s low interest rate and the currency’s low volatility. As experience now shows, the Swiss currency proved safe indeed. The interest rate on euro loans is 1.5% higher than Swiss franc loans, while forint loans are 4% higher than those in the Swiss currency, says Csaba Zentai, vice president of the Hungarian Leasing Association.

In addition, Swiss franc-denominated interest rates on leased cars have been halved in the past two years. These days, gross leasing prices when buying a new car are usually below 5%–8%, and somewhat higher than 8%–10% when purchasing a used vehicle. But you can always find a marketing deal that offers 2%–4% GLR leasing, Horváth says.

You can also find ads for makes of automobiles available with zero-GLR leasing, notes Tamás Révész, CEO of Budapest Car Financing Rt. These, however, can be misleading, he notes.

The law regulating the composition of GLR stipulates that the difference between the selling and buying price of the foreign currency in which the lease is denominated (which, in most cases, is the Swiss franc) must be included in the GLR. As a result, Révész points out, there are in reality hardly any foreign currency loans or leasing contracts with zero-GLR financing.

“Even major players on the leasing market are neglecting their legal obligations and failing to include currency exchange rates in their GLR calculations. Thus their GLR ratios appear to be 0.5%–3% lower than they really are. They are misleading their clients, and causing a competitive disadvantage for those playing by the rules,” Révész says, advising future clients to ask for precise details before closing a leasing deal.

Besides low prices, there are other small sweeteners leasing firms offer in order to gain a competitive advantage. HVB Leasing Hungary, for example, offers clients the choice between paying on the 1st or 15th of each month.

“Companies don’t like paying in the middle of the month because it’s close to when they pay VAT (on the 20th), while private individuals are often late with payments because they haven’t received their monthly wages by the 1st of the month,” says HVB’s Horváth.

Budapest Car Financing offers another extra service. If a car buyer takes out the firm’s credit insurance policy, which is about 6% of the monthly installment, he or she is insured not only against accidents (even fatal), but against job loss as well, Révész says.

Car buyers can also encounter less favorable terms, however, so it’s important to read any small print before signing a leasing contract, Révész cautions. It’s also well worth being aware of penalties for breach or termination of a contract, he advises.

“One client came into some money unexpectedly,” Révész recalls, “and decided to terminate their contract by paying up front in cash. The company actually claimed an extraordinary administrative cost equal to 25% of the car’s price.”

The normal fixed fee for changing contract terms is Ft 30,000–Ft 35,000 (€120–€140), or 3%–5%, of the remaining capital payment.

According to Révész, a dealer might also try to impose on the buyer some extra fee for closing a deal or covering administrative costs. This practice is illegal, so clients should read their contract carefully in order to avoid any unpleasant surprises.


Money up front


Car buyers often only care about the amount of monthly installments, without taking other costs into consideration. They might thus end up buying a bigger car than they can afford, or forget about the price of comprehensive insurance (casco), according to Ádám Anderle, vice president of Lombard Leasing Rt.

If someone leases a car with a less than 10% down payment, most leasing companies will insist that the client take out a casco policy. With a low down payment and long-term leasing contract, the price of this insurance can reach 50% of the gross monthly price – even for a cheap vehicle. For expensive cars, the casco price can be even higher – in some extreme cases, almost equal to the monthly installment, Anderle says.

On the other hand, if the original down payment is at least 10%, and the contract terms do not extend beyond 60–62 months, the client might buy the car without casco. If the car buyer wants the insurance, the monthly price will not be higher than 30% of the GLR. Anderle believes this is a difference worth taking into account.

Some dealers advise their clients to take out a comprehensive insurance policy – leasing firms will insist upon this – for the first year, and then to forget about it. Such an arrangement has immediate benefits, but leasing firms are more often in cahoots with insurance companies that will warn leasing firms if a client terminates an insurance contract or is late with a policy payment, press reports say.

Down payments on new cars have shrunk in the last two years from an average of 30%–40% to below 20%, and to about 35% for used vehicles.

But there are even better deals. Several “suicidal” leasing firms are offering small cars valued at less than Ft 4 million with down payments of under 10%, says HVB’s Horváth. Last year, Opel dealers offered Corsa and Astra models for a Ft 49,900 down payment.

If you dig through the ads, you can even find deals nearly every month for no money up front.

“Suzuki dealers recently made such an offer,” Horváth recalls. “Some desperate dealers have even been known to hand over a few hundred thousand forints to clients who’ve signed a leasing contract – unofficially, of course.”


Increasing maturity


The average period of maturity of leasing contracts is also getting longer and longer. This year, the maximum maturity is 100–120 months, but more cautious firms, like HVB Leasing, are demanding a loan guarantor to back up leases of over 60 months’ duration.

“The maturity period of long-term loans is often longer than the lifetime of the car itself,” says Horváth. “The only people applying for such loans obviously can’t afford the car, and are unable to measure their financial capability.”

These cars often end up being repossessed by the leasing firm, according to Horváth’s experience.

Moreover, clients who take out a long-term leasing policy are unable to offload a car without taking a loss, Anderle warns.

“The value of the car shrinks much faster than the amount the car buyer still owes to the leasing firm. So even if the owner sells the car, he can’t pay back all the remaining debt,” he explains.

“Most people in this situation sell the car and pay back the remainder of the leased amount during the third or fourth year,” Horváth says.

As far as customer creditworthiness is concerned, in their desperate bid for customers, leasing companies are proving to be more forgiving than ever when it comes to measuring up client solvency.

“At some leasing firms, it’s possible to lease a low-price car by merely showing a driver’s license and some other form of identification,” Horváth says.

“This might be useful for clients with substantial amounts of undeclared income,” one anonymous expert reveals. It’s also worth making personal enquiries, the source adds, because at some companies, measuring client solvency is more relaxed in practice than stated in company brochures and other materials.

Stricter firms like HVB Leasing, however, ask for phone or electricity bills, an employer’s certificate and income tax return for all potential leasing agreements involving cars worth at least Ft 3.75 million.

As the car financing specialist arm of OTP Bank Rt, Merkantil Bank asks for phone numbers and checks the employment status and income of a client by phone. The bank may also take a look into tax returns, balance sheets and other Court of Registry documents of any self-employed client, says Köntös.

“The times when the golden rule was that leasing installments should not be higher than 30% of a client’s monthly income are over,” Horváth acknowledges. Now, leases paid in installments amounting to 50% of income are normal, but if there is more than one breadwinner in the client’s family, the installment can reach 100% of income, he says.

“We compare the price and type of car to the client’s income,” Köntös says.

Horváth reveals that cheaper cars are easier to sell, while two-door models and cabrios are very risky. Smaller sedans are more readily available to low-income clients.

“When calculating the maximum loan amount, we extract the installment from the number in the income-tax return, and expect that the minimum wage will remain intact for the client every month,” Köntös explains.


Bargain prices


The fact that some leasing firms are quite reckless when measuring client solvency, offering cars with minimal down payments, has already resulted in an industry-wide rise in defaulted debt – from 1.6% to 2.5%, and from 2.2% to 4.2% for the ten major industry players observed by financial watchdog the State Financial Supervisory Authority (PSzÁF).

Defaulted debts in the entire sector already total Ft 17.7 billion this year, and the previously mentioned ten firms account for 59.3% of this total, the PSzÁF reported this month.

The financial watchdog is also worried about the growth in the percentage of car leasers making late payments (up from 25.1% to 27.8%).

What’s bad for leasing industry profitability might be good for potential car buyers, however. According to press reports, financiers repossessed 16,000 cars last year, while 25,000 vehicles are likely to be repossessed this year. These used cars represent extra supply on the used car market, and are pushing prices downward, car dealers complain.

Taken back from clients, these cars are often sold in package deals to used car dealers, but in some cases are listed on the leasing company’s own website.

“For the potential buyer of a used car, it’s definitely worth browsing,” Horváth advises.

“These cars are 10%–20% cheaper than the same makes from the same year at a used car dealer – though they are often much more worn down.”

“Leasing companies haven’t yet solved the problem of getting rid of these cars,” says Pap of VB Leasing. “Most cars are sold after an independent expert’s evaluation, but my advice to any potential buyer is to take the vehicle to either a licensed mechanic or car-savvy friend. Those people can tell you if a car has not been properly taken care of, or even if parts have been removed.”

Source: BBJ



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