By Ray Birch
CINCINNATI—Expect leasing to make a comeback in 2023, one expert is predicting, citing skyrocketing new car prices and elevated used vehicle values that are driving consumers to find ways to lower the monthly payment.
Scott Hall, executive vice president of Swapalease.com, told CUToday.info he expects more lenders, including credit unions, will offer leasing as a means to help their members manage the monthly budget.
“It’s been a pretty phenomenal rise in new vehicle prices,” said Hall. “Before the pandemic the average new car price was around $34,000. And now I believe the average price is near $47,000. That is unbelievable change in just a short period of time, and consumers are feeling the shock. Combine that with rising rates, and payments today may be 30% to 40% higher for consumers than just a couple years ago.”
Hall noted that when leasing was enjoying a heyday as recently as a several years ago, it accounted for 33% of all new car sales. Today, that figure is in the lower 20% range, he estimated.
‘Record’ Penetration
Hall forecasts that leasing will surpass 25% share of new vehicle sales in 2023, and then in the following years rise even higher.
“If we look out past 2023 to 2024 and 2025, we will see a new record in terms of lease penetration,” said Hall, emphasizing the correlation between vehicle prices
It isn’t just consumers that are driving the trend toward leasing. Manufacturers, too, want leasing penetration to rise.
“Leasing gives manufacturers a lot of control over the client,” he said. “Once you have a client in your leasing pipeline, it’s a lot easier to sell them another car.”
Market to Get More Competitive
The overall automotive market will become more competitive, as supply chain issues wane and production ramps back up—which is already occurring, said Hall, explaining that will lead to the return of more robust carmaker incentives.
“We’re also seeing new electric vehicle companies entering the market,” he said. “And leasing is a good way to go on those cars. Financing on an electric vehicle, going out long in terms, could be seen as risky, as that technology becomes very obsolete quickly.”
Hall echoed what may automotive industry analysts have been stating in 2022, that installment loans for vehicles are simply becoming unaffordable for a growing number of Americans.
Scot Hall
“As cars get more expensive people will just gravitate more to leasing,” he said.
What Remains to be Seen
It is not easy to predict how automakers will adjust residual values due to what has been highly inflated used car prices.
“It remains to be seen if they make a lot of adjustments, but with used car prices being high over the last couple years, historically that would be good for residual values,” said Hall. “Higher residual values would be good for leasing, as they translate into lower monthly payments. That said, I do think there will be some adjustments made by the major residual value players, due to what has been and odd used car market.”
With that “odd” market and the potential for inflated values to not only continue declining but to drop precipitously in the coming year, Hall said consumer’s problems with negative equity will only increase. As CUToday.info has extensively reported, a growing number of consumers are upside down on their car loans.
“People buying cars now are paying historically high prices,” said Hall. “If the market normalizes, it's likely they're going to see a pretty significant amount of negative equity. A shorter-term lease, one that is far shorter than a long-term installment loan—which are only getting longer—can solve some negative equity situations when a consumer goes from a loan to a lease. ”
An Uptick in Business
Hall noted that Swapalease.com, which connects consumers who want to exit a lease early with someone who wants to pick up a short-term contract, is seeing more lease transfer business today.
“Earlier in the year our lease transfer activity was down somewhat, and out lease buyout activity was up,” said Hall. “Now we're starting to see a shift in that with our lease buyout activity moving more toward normal levels. That’s a very good sign that the car market is starting to normalize.”