By Ray Birch
CINCINNATI—While there have been some fears in credit unions a plunge in used car values could leave some borrowers upside down in their loans and turning in keys, one expert is predicting vehicle prices won’t be dipping anytime soon, and adding there is growing interest in consumers taking over short-term leases or buying the car when the lease expires.
Moreover, elevated used prices are driving residual values higher, likely making leasing more attractive to lenders in the near future, the same expert added.
As CUToday.info has reported, supply chain issues continue to slow new car production and contributed to keeping used car prices elevated. The reporting has also outlined how there’s been an uncharacteristically large number of consumers buying out leases to avoid sky-high car prices and increasing interest rates.
No Question
“No question about it, used car prices were sky high in 2022,” said Scot Hall, EVP at Swapalease.com, noting the trend remains very much alive in 2023. “Consumers, too, are turning more to short-term leases to escape the high cost of not only cars but the high interest rates.”
Hall said that is reflected in data from Swapalease.com, which matches lease holders who want to exit a lease with buyers interested in picking up a shorter-term lease—and today, at likely lower financing rates.
“What is very important to look at now is a much higher than normal number of people are buying out their leases, meaning they are purchasing the vehicle when their lease term ends or even midstream,” explained Hall.
Increase Can be Seen
Hall told CUToday.info that the increase in the number of consumers coming to Swapalease.com this year is clear, and they are looking for a lease to buy out or for someone to buy out their own lease.
“That is where the market has pivoted,” he said. “Our numbers were down in 2022 compared to 2019 in terms of those with interest in transferring a lease. And 2019, as we know, is the last full year before the pandemic, where we had a normal automotive market with replacement vehicles readily available.”
Hall said his company’s data offers a good gauge on consumer interest in the category.
“Thankfully, interest in exiting a lease via a buyout and sale has helped us pick up any slack, and then some,” he said. “Additionally, lease transfer interest is ramping up again as vehicles remain in short supply.”
Scot Hall
The Trends
Hall said Swapalease.com collects leads through its website, which are turned over to the company’s lease professionals for follow up.
“The Swapalease website has different channels for users depending on what they are looking to do,” Hall explained. “Channels for transferring a lease and selling a lease both exist. The increase in lease buyout leads we are seeing so far in 2023 is higher than we saw in 2021 or 2022. First-quarter results indicate strong consumer interest. And I think our numbers will look even better as we go through the next 12 months due to challenging market conditions slowly improving.”
Hall explained that Swapalease.com data show that even during the bleak car-buying pandemic years there was interest among consumers in finding ways to get a new, used or leased car into their garages.
“That really shows that there were people looking everywhere they possibly could for a different car,” he said, stating the Federal Reserve rate hikes have driven the shift to more leaseholders buying their car at the end of the lease term. “The unfortunate part of this, for consumers, is there's just only so many leases out there available for transfer or buyout.”
A ‘Wait & See’ Year
Hall described 2023 as a “wait-and-see” year that will determine if the current trends hold, or shift back to more normal levels of car supply and consumer buying habits.
When it comes to leasing in 2023, Hall advised lenders to pay close attention to residual values.
“The fact that used cars are holding their value well should be good for leasing,” said Hall. “The biggest factor in the lease is not the interest rate, it is the residual value—the projected value at the end of the lease term.”
Most leases are around three years in length, Hall noted.
“In addition to whatever money a credit union or bank makes off their lease portfolio during the lease term, residual values play important role. If projections end up being relatively accurate or even conversative, more money can be made at lease termination,” Hall explained. “The opposite is also true. Overestimated projections can wipe out margins for lessors. Said differently, a lot of the leasing equation from a corporate perspective has to do with how accurate they are in predicting future values when it comes to making or losing money.”
What to Plan For
Hall said lenders offering leasing should continue to plan for used values, and therefore residual values, to be higher than normal.
“I think over the next two to three years it's safe to say used values are going to be higher than they normally would be historically. That should take a lot of the risk off the table for lenders when they're setting up leases because they can be more aggressive on those projected values,” Hall explained. “The leasing outlook, from a residual value standpoint, should look pretty attractive to lenders over the next couple years.”
Hall said he believes that’s one reason that leasing, as a percentage of all new car sales, will begin to climb back toward the 33% level leasing enjoyed several years ago.