Toyota's financing arsenal mixes leases, low APRs
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Now that Toyota Motor Corp. has put last year's earthquake-induced vehicle shortages behind it and dealers' lots are full again, the company is pulling out an arsenal of loan and lease offers to help retailers move the metal.
So far this year, Toyota's U.S. sales are up strongly. Toyota-brand sales jumped 55 percent in June, and 29 percent in the first half. Lexus-brand sales rose 86 percent in June and 23 percent in the first half. Meanwhile, industrywide light-vehicle sales rose 22 percent in June and 15 percent in the first six months.
Toyota's gains were mainly due to better availability of vehicles. But a newer lineup, including a 2012 Camry that was redesigned last fall, has helped.
So has a wide range of finance deals.
"We provide a wide array of programs, retail [loans] and lease, to give our customers the choices they deserve," wrote Frank Churchill, Toyota Financial Services national manager of finance products, in an e-mail.
For example, consider cut-rate loans. Toyota currently offers 0 percent financing for some models and 1.9 percent for others. Bob Carter, Toyota Division general manager, said during a conference call discussing June sales that Toyota will be adding more 0 percent offers in July.
In addition, Carter said, "Thanks to strong residuals, great lease rates are available on Camry, Corolla and just about every model in our lineup."
Aging models benefit
Toyota's best lease deals are on models that are late in their lifecycle, Carter said, citing the Toyota Corolla and RAV4. Newer models don't get subvented lease deals, he said.
Advertised specials on Toyota.com effective through July 9 included a $149 monthly payment on a 36-month lease, plus an additional $1,000 "lease bonus cash" for some regions on the 2012 Corolla; or $189 a month on a 36-month lease, plus up to $1,500 additional on the 2012 RAV4.
And Toyota has no plans to take its foot off the gas pedal.
Although Carter said Toyota incentive spending levels are "at the bottom of the industry … with Hyundai," Toyota will continue to offer leasing and interest-rate deals through July on all core models.
So far this year, Toyota's lease penetration is relatively low, which implies a low level of lease incentives. The Toyota brand's lease penetration was only 15 percent through May, the company said. That's down from an average of 17 percent for all of 2011 and 22 percent for 2010.
To put that in context, industry lease penetration in the first quarter of 2012 was 24 percent, down from 25 percent a year earlier, data from Experian Automotive show.
In the luxury segment, Lexus lease penetration is also below that of its main rivals. Through May, Lexus' lease penetration was 40 percent, the company said. BMW's lease penetration through May is around 50 percent, says BMW Financial Services. Lease penetration for Mercedes-Benz was 65 percent in the first quarter, Experian's data show.
'Much healthier'
"We are really lucky. We have a much healthier lease-finance-cash [mix] than other luxury brands," said Mark Templin, general manager of the Lexus Division. "We have stronger true residual values, residual values that are not propped up by incentives."
Strong residual values are a hallmark of both Toyota and Lexus brands.
According to ALG Inc., a company that produces widely used forecasts of residual values, the Toyota brand had an average predicted residual value of 49 percent of sticker prices after 36 months vs. 42 percent for Chevrolet, 44 percent for Ford, and 45 percent for Nissan. That's a monthly payment advantage for Toyota vs. Chevrolet of about $45 on a $25,000 vehicle.
Among the top seven biggest-selling brands in the U.S. market, only Honda was higher, at 50 percent for 36 months. Figures are year-to-date averages, through the July-August ALG Guide.
Lexus, meanwhile, is slightly ahead of its rivals in predicted residual values. So far this year, ALG is predicting today's Lexus vehicles will retain 47 percent of their sticker price in 36 months vs. 45 percent for both Mercedes-Benz and BMW. (See table “ALG trims residual values” in right column of this newsletter.)
Inflated values
Across the industry, automakers sometimes inflate predicted residual values as a form of incentive because a higher residual value reduces the amount that the lease customer has to finance. That makes the vehicle more affordable in the form of lower monthly payments.
When automakers purposely inflate residual values, they typically set aside reserves to pay for the expected loss. But trouble can erupt if the losses are even bigger than expected, as they were in 2007-09, when soaring gasoline prices and then a collapsing economy pulled the rug out from under residual values. Financing institutions discovered their reserves weren't sufficient and had to take billions of dollars in charges against earnings for unexpected losses on lease returns.
So automakers and their finance arms worry about getting too dependent on subvented leases.
Instead of using overly optimistic residuals in leases as a means of making customers' payment more affordable, Toyota, in finance parlance, "buys down the money factor" when it wants to support a lease deal, Carter said. For instance, Toyota Motor Sales U.S.A. might pay Toyota Financial to offer leases at a reduced interest rate. It's similar to subsidizing loans so the financing institution can offer 0 percent or 1.9 percent on a loan, only in leasing it's called a money factor instead of an annual percentage rate.
You can reach Jim Henry at autonews@crain.com.
