Once Near-Dead, Leasing Hits All-Time High

Leasing set an all-time record, accounting for 31.1% of all U.S. new-vehicle transactions in the year’s first quarter, says data-tracker Experian Automotive.

U.S. automakers and their dealers sold and leased 4.1 million vehicles during that January-March period, according to WardsAuto.  

“The continued rise in new-vehicle costs has kept many consumers exploring options to keep their monthly payments affordable,” says Melinda Zabritski, Experian’s senior director-automotive finance. “As long as vehicle prices continue to rise, we can expect leasing rates to grow along with them.”

Done right, leasing is a valuable financial tool for automakers, says Tom Webb, chief economist for Manheim Consulting. But overly generous lease deals can result in high back-end residual losses. Struggling during the recession, General Motors and Chrysler virtually ended leasing back then because of mounting financial losses caused by actual off-lease residual values coming in nowhere near forecasted values set at the beginning of leases.

Leasing reached 3.7 million vehicle deliveries in 1999 but bottomed out at 1.1 million a decade later. Since 2009, leasing has steadily recovered.

Dealers like leasing because it keeps customers coming back, giving auto retailers another shot of putting them in a new vehicle.

“Leasing is fantastic,” Jonathan Banks, an analyst for the National Automobile Dealers Assn, said at a recent industry event. “You get people returning to dealerships more often because of that 3-year churn.”  

But he expressed that some automakers’ overly generous lease subventions, running as high as $5,500 on mainstream cars, ultimately could cause problems.

The average new-vehicle loan amount reached $30,032, an all-time high, Experian says in its latest market report. Average monthly payments for new-vehicle loans hit $503, another record.

“The record highs we have seen in vehicle prices also have had a significant impact on the loan market,” Zabritski says. “For example, the number of prime borrowers who switched to leasing has driven an increase in the percentage of subprime borrowers shown in the new vehicle segment.

“As a result, we will continue to see consumers view used vehicles, longer-term loans and leasing as a way to keep payments affordable.”

Zabritski offers something of a warning for consumers considering leasing rather than buying a vehicle: “Understand the nuances” of lease agreements and make sure leasing fits the driver’s lifestyle.

In other words, it’s not for everybody. For example, road warriors who pile on the miles would be wise to steer clear of leases that assess excess-mileage charges.

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