Dealers See Lease Recovery

After dropping precipitously in the past few years, the percentage of new-car purchases financed through leasing is recovering.  Analysts tell WardsAuto that the recovery is coming at a good time for dealers, given high interest rates and other purchase impediments. But they will still need to deal with the consequences of the leasing slowdown.

“For dealers, (the earlier drop in leasing rates means) in the future they will have fewer late-model used vehicles in the market,” says Melinda Zabritski, senior director, automotive financial solutions at Experian.

From historic rates of 25% to 30% of new cars financed through leasing,  in 2022 and 2023, rates plunged to an average of around 18% due to a new-vehicle inventory shortage, she says.

For example, Toyota leasing rates dropped from 28% in 2021 to 16.6% in 2022 and 14.3% in 2023, according to Experian data.

Luxury marques tend to be financed through leasing at higher rates than volume brands,  but luxury brands, too, have seen a fall in leasing in recent years. Mercedes-Benz, for example, saw the percentage of new cars leased rather than bought drop to 40.5% in 2022 and 2023 from 59% in 2021.

Given the usual 3-year lease cycle, dealers won’t immediately feel the leasing decline on their used-car supply, Zabritski says.

But it’s coming. Experian expects the average volume of off-lease supply of close to 1 million units to drop to 900,000 in the fourth quarter of 2024 and 600,000 in late 2025. In the first quarter of 2026, supply will plunge to 550,000 units, they predict

Dealing With the Aftermath

Lease returns are a prime source of Certified Pre-Owned (CPO) used vehicles for dealers. Fewer lease returns mean dealers may need to certify older models.

“They can work with consumers on the CPO programs,” Zabritski says. “They might want to push consumers into 4- or 5-year-old vehicles.”

Indeed, some manufacturers have announced programs certifying even older vehicles. For example, Toyota and Honda now certify vehicles up to 10 years old.

Leasing benefits dealers in other ways besides used inventory.

“Leasing is great for dealers because it ties the customer back to the dealership,” Jill Louden, associate director for AutoCreditInsight, part of S&P Global Mobility, tells WardsAuto. “It is really a loyalty and retention tool.”

With the average transaction price for a new vehicle approaching $49,000, according to Kelley Blue Book, leasing is also a great way to bring people back into the marketplace with a lower monthly payment, Louden says.

She recommends dealers get their salespeople to be “sensitive to (prospective buyers)…experiencing sticker shock.”

As inventory rises, “what I would want to do is make sure my salespeople are comfortable responding to customer needs and being flexible on getting people into a lease or loan,” Louden says.

The percentage of new cars financed through a lease is making “small gains,” she says. In April 2023, it was 21%; by April 2024, it had risen to 25.55%, according to S&P Global Mobility and TransUnion.

The lease market will continue to recover, Louden says. “We are trending to higher days’ supply and inventory, which means our manufacturers and all finance sources will have to look to being more competitive and provide more incentives,” she says.

Push Those EV Leases

One leasing area dealers should lean heavily into is the battery-electric-vehicle segment, analysts say.

The Inflation Reduction Act (IRA) criteria for receiving a tax credit for buying a new BEV are complicated, Tyson Jominy, vice president, customer success, data & analytics division at J.D. Power, tells WardsAuto.

On the other hand, “lease consumers face very few complications,” he says.

The impact on EV leasing is already clear, Jominy says. The IRA regulations went into effect during the first quarter of 2023. Leasing rates shot up from 9.1% at the end of 2022 to 25% in the first quarter of 2023, according to J.D. Power.

They continued to rise quarterly, hitting 65.5% in the second quarter of 2024.

Manufacturers also offer incentives on EV leases, which rose from 2% of MSRP in the first quarter of 2023 to 12.5% in the second quarter of 2024, according to J.D. Power.

“Dealers should be pushing leasing EVs as long as there is a competitive program for it,” Louden says.