Changing marketplace and uncertain future contribute to the increase
Automotive leasing has been steadily gaining in popularity since the recession, driven by many factors. Many believe that Millennial car buyers aren’t interested in being stuck with an outdated car in a few years, and they recognize the brisk pace of innovation in the industry. One third of new car buying Millenials choose leasing over buying, making up a full 12% of new car leases. But another factor is driving the popularity, and that’s the manufacturer’s themselves.
Car makers in the 1990’s used leasing to help move slow-to-sell inventory, essentially subsidizing the sales by inflating the residual value. In leasing, the residual value is what the car is valued at by the car company at the end of the term when the consumer returns it. They often inflate this value and take the loss when it comes time to put the car back on the market. The increased residual value means lower monthly payments and helps convince buyers to take the plunge.
The promise of lower payments led to a peak in new-car leases in 2016 of 4.3-Million, accounting for almost 30% of all new vehicle transactions. That’s up from just 1-Million in 2009 at the depths of the recession. According to Edmunds,the average monthly payments for leases were $120 cheaper. For trucks, that number jumps to $206 cheaper per month. The sales numbers have been good for the industry, but now the car-makers are paying the price for these inflated residual values.
Another trend that the increase in leasing has created is a spiking used car sales. For 2017, also according to a report by Edmunds, used cars sales peaked at 39.2 million vehicles. Many of these were off-lease returns that have flooded the market, often in very good condition and with low miles. The manufacturers, by ‘subventing’ the leases, have taken the depreciation hit so neither the original lessee or the used-car buyer needs to. The increased supply of used cars caused by the increased leasing rates will further hurt their residual value.
When you couple all these trends with uncertainty in the automotive market, brought about by up-in-the-air environmental standards and a burgeoning trade war. The Trump administrations tariffs on Steel and Aluminum are already causing manufacturing costs to rise. The threat of more tariffs looms large, and with the bad taste in their mouth from having to make up the difference on the last round of leases, manufacturers are starting to hike lease rates and bring down residual values. With each and every month, it gets a little more expensive to lease a car, and that will surely cause more people to look into buying again. As always, do as much research as you can into any finance agreement you’re entering into, and take advantage of manufacturers who subsidize leases to help move their cars.