Leasing has accounted for a quarter of new-vehicle sales for more than a year. That might imply stability, but industry watchers say leasing penetration deserves close monitoring.
With new-vehicle prices going up, many consumers lean toward leasing because they cannot afford new vehicles. Although there are many positive aspects to leasing, a level that’s too high could negatively affect the market as a whole, concerned observers say. Dealers, manufacturers and lenders each need to play a part in maintaining the balance needed to sustain a healthy overall market, those observers add.
“We need to maintain balance and don’t want to artificially boost demand through leasing,” Bruce Clark, senior vice president for Moody’s Investors Service’s corporate finance group, told Automotive News.
New-car lease penetration has been above 25 percent since June 2014, Experian Automotive data show. In July, leasing’s penetration rate hit 27 percent. As those vehicles come off-lease and flood the used market in the next three or four years, it could have a negative impact on new-vehicle prices, Clark said.
As the used-car market becomes crowded with low-mileage, younger off-lease vehicles, used prices will soften, and new vehicles will have to be priced lower to compete, he said. Otherwise would-be new-vehicle buyers may choose a 2-year-old off-lease vehicle instead.
Leasing has positives, analysts say. For one thing, it helps keep the market stable, Thomas King, vice president of PIN OEM operations at J.D. Power, points out. For example, the average lease term in the second quarter was 36 months while the average loan term was 67 months, Experian data show. Lease and loan terms offset each other, King said, balancing the influx of consumers into the market. Leasing “creates a nice steady stream of customers coming into the showroom,” he said.
Another leasing plus, notes Melinda Zabritski, senior director of automotive finance at Experian, is that vehicles coming off lease build dealerships’ late-model used-vehicle inventory.
But leasing comes with risks, King said, the biggest of which is the potential loss to a manufacturer’s captive finance company or other lender if a vehicle’s actual value at the end of the leasing term falls short of what had been the projected residual value. Residual values are tough to accurately predict because values are subject to factors the industry can’t control, such as economic conditions and gasoline prices, he said.
Tom Libby, manager of loyalty solutions and industry analysis at IHS Automotive, agrees. Some lenders and manufacturers’ captives artificially raise residual values to lower monthly payments and stay competitive, he said. At the end of the lease, though, “the actual value may be less than the residual on the books,” he said. “If the vehicle comes back under that book prediction, manufacturers lose money.”
Is there a lease-penetration tipping point that would cause a market tailspin?
That’s hard to say, as Experian’s Zabritski notes. But there are things the industry can do to keep the risk in check. Auto lenders and manufacturers must exercise discipline, and dealers should develop a clear process for clearing their lots of off-lease vehicles.
Financing originators, whether banks, captives or other lenders, must act with discipline when approving leases, Clark said.
Manufacturers should also have discipline, King said, when launching incentives and in aligning production with demand. They should “avoid anything that will depress residual values,” he said. They should also have an effective certified pre-owned program. A “CPO channel is a key tactic manufacturers can execute,” he said.
Dealers, for their part, should sell as many off-lease vehicles as possible through manufacturers’ certified pre-owned programs. “When a vehicle is certified, it tends to earn high prices. That makes sure residual values remain healthy,” King said.
Consumers also value the other benefits that come with a CPO vehicle, he said, such as the vehicle meeting a certain standard, having up-to-date service and coming with a warranty.
Consumers can have a new-car experience with a used vehicle, particularly a CPO one, he said, and that creates an opportunity for dealers to build a positive relationship with the consumer.