Car buyers are nervous for a variety of reasons. Rising interest rates, stagnant inflation-adjusted wages despite low levels of unemployment, and rising vehicle costs due to steel tariffs are all blending to give consumers the jitters. This hesitancy is increasingly showing up in monthly vehicle sales. The cost of new vehicles, we have seen, is driving renewed interest in used vehicles. But it’s also doing good things for the vehicle leasing market.
Rising interest rates, of course, are pushing up the monthly costs of owning a new vehicle, so leases are even more attractive. The leasing model among vehicle buyers continues to grow, with more than 30 percent of all new vehicles being leased. It’s also an appealing way to drive for younger consumers (think Millennials, who are the fastest-growing market in the vehicle sales business) and people who enjoy the features of a new vehicle without the high costs and down payment.
In 2016, monthly payments for a leased car averaged $120 less than the average finance payment for purchased cars, according to Edmunds.com. The difference for trucks is even more dramatic: lease payments for large pickup trucks averaged $206 less than finance payments for purchased trucks. At the same time, the share of vehicles leased in the U.S. grew in the second quarter of 2018 to 30.41 percent from the first quarter’s figure of 29.83 percent. Since interest rates aren’t about to go down anytime soon and fallout will continue from tariffs, vehicle industry experts expect leasing’s popularity to grow.
As affordability remains an issue, we may begin to see new players in lease financing, as well, according to Robert O’Hara of GrooveCar, who noted that credit unions are uniquely well poised to help customers benefit from vehicle leasing, while simultaneously overcoming the challenges to credit unions’ business models that a rising rate environment can present.
“Even as the overall automotive market may be shrinking, credit unions are in a good place to thrive as they continue to grab a greater share of vehicle loans,” he wrote. “In only five years, the percentage of loans made by credit unions has increased from 14.7 percent to 20.4 percent – a 39 percent increase. One area credit unions can expand their market share can be found within the highly attractive auto lease market.”
Dealers, the traditional purveyors of leasing, will need to remain alert and responsive to customers looking to lease. Dealers will need to ensure they’re offering competitive deals to those offered by the new players that will undoubtedly look to position themselves for a slice of the leasing pie.