Will the increase in rates be the reason for leasing

A never-ending rise in rates

A few days ago, my Banking Account Manager asked me if the rise in interest rates would have an impact on leasing and particularly long-term leasing ( LTL ), as it may have on the banks' entire loan offer (investment, real estate or consumer). And indirectly, can we fear a slowdown in leasing activities, and therefore in anylease?

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An additional cost for households and businesses

One can indeed wonder about this issue when one looks at the surge in interest rates and their impact on the economy. Higher interest rates inevitably mean higher costs for households and companies and therefore a decrease in purchasing power.

This phenomenon is all the more worrying because it does not seem to stop, even though it should be a response to regulate inflation. In reality, nothing is happening as the good old monetary mechanisms predict. Inflation continues to grow and the increase in interest rates only penalizes the economy without any action on the price level. We then find ourselves in stagflation, as the excellent article by Bertrand ROUDAUT in Le Monde on January 23 or in La Tribune on January 24 remind us.

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High rates do not penalize leasing

Every leasing company must keep a close eye on its refinancing rate in order to control its margins and its competitiveness vis-à-vis its competitors. Because, let's not forget, leasing is also about buying money, which can be considered as one of the ingredients of its offer. However, the rise in interest rates should not affect the leasing business, and particularly long-term leasing. The latter, as we have mentioned on several occasions and in particular in our article " Leasing, LOA, LLD comparison and similarity " or the one entitled " Lease financing: the purchase option not so optional " integrates the estimated resale value of the good (used car in the automotive industry) as a deduction from the financing cost. This value can represent several tens of percent of the amount of the initial investment and reduce the cost of ownership by as much.

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Much higher bank prime rates

In the mid-90s (I'm talking about a time that people under 30 can't know 😉 ) the bank prime rate exceeded 7 percent per year and in no way penalized the development of Long Term Rental. On the contrary! By strongly reducing the cost of ownership, the long-term car leasing has known, at that time, a considerable development with companies and in particular with the biggest ones which have well perceived the financial advantageof disengaging their top of the balance sheet and reducing their costs. Some French and European players have even become world champions in the field. Long-term car leasing then developed with smaller companies and today it is aimed at individuals. The latter are particularly interested in it because they are confronted with both the rise in interest rates and theconsiderable increase inthe sale price of vehicles in recent months.

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The real risk is the residual value!

So yes, I told my advisor about the leasing business in a reassuring way and even encouraged her to offer these financing solutions.

But there is still a pitfall to be avoided that the profession would be wrong to minimize. It is precisely that of properly evaluating the resale values (RV) at the end of the contract. Values that are too high could represent a financial risk on the realization of possible capital losses. On the other hand, values that are too low could kill the goose that lays the golden eggs and erase the financial advantages of long-term leasing, which would no longer appear to be economically interesting, taking into account the double impact of financial rates and the sale price of vehicles. It is still necessary to have an expert system for integrating the depreciation of RVs and an efficient pricing tool.

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