Today, car leasing is a standard mass practice. Advance payments, monthly installments, residual valueThe residual value is present in... More – these are all everyday terms. However, this has not always been the case. Today we are going to introduce to you the person who created the structure of the modern automobile leasing, to which we owe the concept of “residual value”, “cost of driving”, as well as the structure of leasing transactions with increased residual valueThe residual value is present in... More. His innovative ideas give him a place in the Leasing History. His name is Eustace Wolfington and he is a Chevrolet dealerSee Supplier... More from Philadelphia, USA.
What is “cost of driving”
Wolfington’s family had been in the transportation business for generations – his family was producing carriages since 1876. From his earliest days as a car salesmanSee Provider... More, Eustis focused not on the price of the car, but rather on the “cost of driving”, trying to add value to his customers by offering the “lowest cost of driving.”
The value of “cost of driving” is the price of the new car, reduced by the residual price of the car when it is resold after two years.
Another factor affecting the cost of driving is the cost of repairs and maintenance. The cost of driving is increased with the cost of maintaining and repairing the vehicle during its use. Eustace noticed that the car dealers could make the necessary repairs much cheaper than the ordinary car owner.
The Problem
In the early 1960s, car prices were slowly rising. As it was customary for a car to be leased until the full repayment of its price, the lease terms also increased. They had already reached 5-6 years in order to enable clients to cope with the increasing lease payments. Eustis noticed a significant problem in the standard leasing schemes. The banks were not interested in the residual valueThe residual value is present in... More of the car, and customers were being committed to one car for longer periods of time. This meant that their cost of driving was gradually increasing and becoming disadvantageous.
Car Trade Cycles
Thus, Eustis came up with the idea of ”trade cycles” of cars. The trade cycle of a car is related to how long it can be driven at a minimum cost of driving, ie. without major repairs. After a market study, Eustis determined this cycle at two years.
The cycle is called a “trade cycle” because after the two-year low-cost of driving period, the customer returned the car to the dealerSee Supplier... More and took his new car, while the dealerSee Supplier... More repaired the old one and resold it.
Wolfinger’s revolutionary idea is for customers to replace their cars with new ones just before they have to be repaired seriously. Wolfington came up with the idea of a “half car” ie. what a customer has to pay in order to always drive a car with a low cost of driving. Thus, the customer paid only half of the value of the car, without any additional repair costs, and lack of remarketing risk. The residual valueThe residual value is present in... More risk is passed over on to the dealerSee Supplier... More, who could cope with it much easily, providing a fixed repurchase price to his client of about 50% upfront. That’s how the “Half Car Concept” was born. Translated with the concepts of modern leasing, it is an operating lease for 24 months with a residual valueThe residual value is present in... More of about 50%.
Although the first half-car leases were offered by Eustis in 1962, his ideas were not quickly adopted. It took him a long time to convince the financing banks that the car had some residual valueThe residual value is present in... More which could be fully guaranteed by dealers. Thus customers do not have to pay this residual valueThe residual value is present in... More if the car dealerSee Supplier... More guarantees the cost of a secondary conversion. The car dealers also had to be persuaded that their sales will increase if they apply the new scheme and provide low cost of driving to their customers. Customers themselves had to be convinced that they do not lose equity by only using the car, and that they would get the lowest cost of driving and save money without ownership of the car.
Implementing Wolfington’s Ideas
It took Wolfington 20 years to convince the market of the added value of his ideas. It was in 1982 that Ford Motor Company finally agreed to test his system at one of its dealerships. The “Pre-trade Your Car 2 Renew” program was launched. It provided information to the customer not only about the price of the car today, but also about its residual valueThe residual value is present in... More in 2 years, which was also guaranteed by Ford. Thus, the “trade” cycle of refurbishing the car was reduced to 2 years, with complete transparency for the customer. Needless to say, Ford’s test was a success. The small trial dealerSee Supplier... More managed to outperform all other dealers in sales, achieving customer returns of 80% (Wolfington’s expectations were of 60%). In 1992, Ford implemented the “Half Car Program” in all its dealerships around the world. Wolfington’s ideas had become the industry standard.
Suddenly everyone fell in love with the concept. Customers could refresh their car every 2 years, no longer carried the residual valueThe residual value is present in... More risk, and no longer had to repair their cars. Car dealers could sell more cars (they actually sold one car three times), had an inexhaustible source of good quality used cars and extremely loyal customers. Car manufacturers were also pleased as demand for cars increased.
клиентите от 80% (очакванията на Уолфингтън били за 60%). През 1992 година Форд прилагат „Програмата Половин Кола“ във всички свои дилърства по света. Идеите на Уолфингтън се превръщат в стандарт в индустрията.
The price of driving in Bulgaria today
The analysis of the Bulgarian leasing market shows that operating leasing"Operating leasing" or "Operational leasing" or... More barely reaches 5% (for the first time in 2019) of the whole new leasing business. Leasing terms for new cars have grown up to 6 years and new car sales (30,000 per year in 2019) are far behind the sales of used cars (about 200,000 a year), which are mostly imported from abroad. This suggests that Wolfington’s ideas have not yet been applied in Bulgaria to the mass consumer who still pays an extremely high cost of driving.
We urge new car dealers and leasing companiesA company whose main activity is... More to learn from Wolfington’s ideas, educate customers and provide us with a low cost of driving.
