LAWRENCEVILLE, Ga. — Noting that used-vehicle leasing still accounts for a small slice of the overall lease market, Black Book said it believes the transaction type represents a viable strategy for moving the glut of off-lease vehicles returning to market his year off dealer lots.

In the second quarter, according to Experian Automotive, the share of used leasing grew from 3.26% in the prior-year period to 3.71%. In its white paper, “How to Grow a Profitable Used Leasing Portfolio,” Black Book noted that several brands, including Toyota, Scion and Lexus, already offer certified leases on used cars. Ally was the most recent finance source to announce it will offer used leases, and the firm said Infiniti is rumored to be considering such a program.

“As the off-lease inventory of three- and four-year-old vehicles continues to increase this year and over the next few years, lenders and remarketers will need to find alternative channels to return these vehicles out into the market,” said Anil Goyal, senior vice president of Automotive Valuation and Analytics for Black Book. “Used leasing may be the right choice for some of these vehicles, but the wrong decision can be detrimental to the profit margins of a portfolio, which is why collateral data can mitigate any vehicle profit risk.”

Although the firm’s white paper offers several recommendations directed at finance sources, it does offer a four-step process dealers can use to identify the ideal candidate for used leasing.

The first step is to identify a used vehicle that didn’t have incentives/subvention tied to it when it was sold as new. The white paper then advises that finance sources, or dealer, review collateral data to find vehicles with relatively low depreciation after three years of age.

To determine the cost of going over the allotted mileage, the firm recommended that finance source review data cents-per-mile depreciation differences between new and used vehicles. The last step is finding lower certified pre-owned costs in order to identify vehicles with a lower capitalized cost.

The firm found that in instances where a used vehicle had heavy incentives and subvented offers, it’s used leasing payment would only be a few dollars less than leasing it new. If the cost of a used lease is $320 per month and a new lease was $330, buyers would likely pay a little extra and choose the new lease. This, the white paper noted, is why used cars that did not have a lot of incentives tied to it when it was new make for better used leases.

By the end of 2016, 3.1 million vehicles will return to the market, an amount that is expected to increase the number of off-lease vehicles by 20% compared to the previous year. Although luxury vehicles are popular leasing options due to leasing keeping payments low, the top leased vehicles returning to market are the high-volume cars like the Toyota Camry, Honda Civic and Nissan Altima.

Those three models along with the Honda Accord, Ford Fusion, Lexus RX 350 and Toyota RAV4 will make up 28% of all leased vehicles that will be returning to the marketplace.

Originally posted on F&I and Showroom