How long can leasing companies delay increasing the end-of-contract damage charges?
Damage to vehicles is a fact of life. It affects all drivers and fleets from the most careful to the most, shall we say, unlucky.
Another fact of life is that damage has a financial impact on the value of a vehicle, and someone has to pay. That someone should be the person that caused it (or at least was responsible for the vehicle when the damage occurred).
Most of the significant leasing companies and captive finance providers follow the BVRLA Fair Wear and Tear Policy, which at least gives some framework around what is acceptable damage.
Things become a little less clear as to the consequences of damages which are not deemed to be acceptable. Many Leasing companies go further on this point and helpfully produce pricing matrices to help drivers estimate damage deemed as Non-Acceptable under the fair wear and tear policy.
These matrices are reviewed with varying degrees of regularity, sometimes annually, and some have not changed for several years, which leads us to the question,
How long can lease car damage charges stay at today's prices?
We have lived in a low inflationary world during the last decade; since 2012, the highest annual inflation has been 2.57% (2012) and the lowest 0.37% in 2015 (Data basis: International Monetary Fund, World Bank and OECD Inflation CPI indicator). This provides the backdrop for explaining why the damage prices charged by Lease Co’s have remained so stable and with such little review. However, with the Consumer Prices Index (CPI 2022) rising by 11.1% in the 12 months to October 2022 and new numbers from the ONS showing the cost of running and maintaining personal transport, specifically, has increased by 15% since last year, we now are faced with a totally different reality, a reality where the current damage matrix issued by Lease co’s are probably 10% lower, depending on the last review date, maybe nearly 15%, than they originally thought they should be.
This cost increase blow may be softened to the lease co’s by the reliance on existing contracts from de-fleet organisations(with fixed prices in them), and they, in turn, are partially protected by the supply arrangements with paint, parts and skills providers, so it is they who share the burden of this, for now. High used vehicle prices have also reduced the necessity for action. However, one thing is for sure, both of these mitigating factors will probably not last, and there is more.
Skills shortage in vehicle repair businesses.
We also need to factor in skill shortage in the automotive industry. Earlier this year Steve Nash the CEO of the Institute of Motor Industry, said “Right now, the automotive retail and aftermarket sectors are facing probably the worst skills deficit for more than 20 years” further research from The Motor Omsbudmen in July 22 revealed that ‘40% of businesses that took part in the study said they would be raising salaries during the next six months to help team members cope with the hike in the cost of living’ and that ‘Before year-end, 63% of businesses polled felt they will be forced to raise prices to remain profitable’
An argument is that this increase in costs within the supply chain is only relevant if the vehicle is actually repaired before sale doesn’t hold up to much scrutiny. Most of the recharge matrices are based on either SMART repair costs or impact on resale value or some formula in that space. Impact on resale costs are determined by the buyer; specifically the amount the buyer reduces the bid by to achieve their desired retail sale price. That bid reduction is directly correlated to the (increasing) repair cost. In practice, this can happen retrospectively as recharge assessment occurs before actual sales results, so it is often factored in across the portfolio - not always on a vehicle-by-vehicle basis. Nevertheless, it finds its way through and therefore affects the value of the vehicle with damage by the amount of the increasing cost of repair.
What impact do Lease vehicle contract extensions have on damage charges?
All of this cost pressure is further exacerbated by the post covid fleet situation. It’s difficult to get definitive data on the number of contract extensions created by the restricted new vehicle supply but according to the BVRLA( Leasing Outlook Report Apr 22) leasing organisations have seen business mileage increase by around 12% and Personal Mileage by 15%, given lead times have not yet begun to contract and data on increasing office occupancy (which can be used as a proxy for more journeys) shows we can expect that to rise further. Some estimates suggest that 50% of lease contracts are returning after the scheduled end date. So we have a situation where older, higher mileage vehicles will begin to de-fleet into fleet companies with damage price cards which may not cover the impact of the damage on the vehicle.
Complaints about damage charges on lease cars
Meanwhile, another dynamic of this situation is the consumer element of this build-up of terminations. The proportion of returns being consumer users has never been higher. For many of these users, it will be the first time returning a leased vehicle and the process will be unfamiliar. It will be a real test of their understanding of what they signed up for, or how well they were informed by the selling party of the liabilities and obligations contained within the lease contract. Far from a situation where consumers feel the charges for damage are good value, they may feel the already suppressed charges are unexpected or too high, or both!
We may see increased volumes of queries and complaints to the customer services teams and escalation services, further adding strain and cost to lease company resources. How will this new level of demand be priced into damage recharges or lease rentals? One thing is certain the cost of dealing with damage will not be reducing unless new solutions and technologies are found to improve processes targeted at good customer outcomes.
Wondle provides a platform designed to manage damage processes before they become a problem for lease companies. It educates, enables and empowers customers in understanding and dealing with damaged vehicles within an effortless, digitally guided experience. Wondle requires no knowledge, no paperwork, no app download and gives instant results at extremely low unit costs, meaning it is scalable right across leasing organisations' processes.
At Wondle, we deliver on our promise that ‘Damage doesn’t have to Damaging’. Contact one of our team today to organise a discovery session.