Capital for the LHPH Industry

Creating financial flexibility one dealer at a time

Lease Contract vs. RISC?

Eyo Toe | March 1, 2021

In today’s market, consumers have access to multiple sources of information which allows them to have access to car models, prices, features, etc. from numerous BHPH dealers in their area. In addition to these changes, COVID-19 has also affected consumer behavior in how they are buying or leasing cars. While competition among dealers is constantly growing, BHPH dealers will need to find a way to differentiate themselves. Leasing gives dealerships a competitive advantage that benefits the dealer and the consumer as well.

Leasing offers dealers several benefits that allow them to gain a competitive advantage. Lease fees are one of the benefits that set apart leases and retail installment sales contracts (RISC). These fees include acquisition fees, purchase option fees, disposition fees, security deposits, excess mileage fees, or excess wear and tear fees. Leasing also allows the dealer to give the asset more than one turn in its lifecycle due to the consumer almost always bringing the car back allowing for additional cash flow with each turn.  Due to the ever-increasing price of used cars, BHPH dealers often have to sacrifice the quality of their inventory in order to keep monthly payments affordable for the customer.  However, thanks to the residual in a lease, the dealer can offer the customer a newer more reliable car for the same monthly payment without extending term resulting in better portfolio performance. Lease contracts are much more flexible than a RISC because the dealer controls the residual value, contract term, money factor (interest rate), and fee structure.

Lease contracts can also provide numerous benefits for the consumer. As mentioned above, the consumer is able to get a more recent model of the vehicle which is much more dependable for the same payment as they would in a RISC with an older higher mileage car. Depending on the term, the consumer will be able to lease a new car from the dealer every 24-36 months or buy their current car for the residual value. In addition, many LHPH dealers provide loss damage waivers and service contracts built into the rent, adding value and peace-of-mind for the lessee.  Similarly, many dealers provide maintenance on the vehicle to ensure the asset is well kept and available to be leased again when the current lessee’s lease matures.

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