Leasing penetration and new- and used-vehicle loan terms have broken all-time records, illustrating the value of a low monthly payment, Edmunds.com said.
Lease share reached 32.7 percent in February, a year-over-year climb of 3.9 percentage points, Edmunds said. With the higher leasing came a drop in finance share.
The percentage of deals financed, at 46.3 percent, still beat lease share, but it’s down 3.4 points from a year earlier. Cash deals made up 21 percent of transactions in February, down 0.6 percentage point from a year earlier, Jessica Caldwell, Edmunds.com director of industry analysis, told Automotive News.
U.S. light-vehicle sales jumped 6.8 percent in February to 1.3 million vehicles. On volume, it was the strongest February since 2001.
The influx of off-lease vehicles coming back to the market in the next two to three years could be a “big problem,” Caldwell said. Even by the end of this year, the number of lease expirations is expected to grow 26 percent from 2015, according to Edmunds’ 2015 Used Vehicle Market Report.
“It’s uncharted territory,” Caldwell said. “We’ve never seen leasing or sales this high.”
To mitigate high levels of lease returns, captives are assigning lower mileage to some leases and varying the timing of lease returns. “But eventually, it will hit a point where there’s not a lot you can do. It’s something automakers are trying to work out the strategy for,” Caldwell said.
The average lease term still hangs at about 36 months, Caldwell said, and consumers whose leases end in that time will most likely stay in the leasing cycle, which is a plus for brand loyalty.
But if residual values drop because of the flood of off-lease vehicles, monthly payments could grow. “That could be an issue for some folks,” Caldwell said.
Today consumers’ view of leasing differs from past views because of a generational shift, Caldwell said. Millennials lease more than other age groups. The short-term aspect of leasing, in addition to the low monthly payment, is appealing for them because it means they can get a new vehicle when their term expires, just like they get a new cellphone when their contract is up. It’s what they are accustomed to, Caldwell said.
Leasing has long been a way for consumers to afford a high-end vehicle. Now consumers are leasing mass-market vehicles in various segments.
Record loan terms
New- and used-vehicle loan terms also reached all-time highs. New-vehicle loan terms averaged 68.7 months in February, up about one month year over year, Edmunds said.
The previous high was 68.47 months in October 2015.
Interest rates on those loans averaged 4.96 percent last month, compared with 4.95 a year earlier. February is always one of the higher APR months, Caldwell said, as consumers typically make need-based purchases in the early months of the year rather than incentive- or holiday-based purchases.
For used vehicles, the average loan term last month was 66.65, compared with 65.62 a year earlier.
Caldwell said she can’t predict when loan terms will begin to flatten. “We’ve only seen them just continue to grow. I don’t know where the ceiling is. I imagine when the credit market begins to tighten a bit, that will be an indication”
Consumers are drawn to long loan terms, as they are to leasing, because of low monthly payments. But the risks, Caldwell said, revolve around equity and advancing technology.
With today’s long loan terms, consumers are often in a negative-equity position if they sell the vehicle before the term is up. And, because of rapidly evolving technology, long-term borrowers also lose the ability to advance to the latest in-vehicle tech features.
“Being stuck in a long loan term is giving [consumers fewer] chances to upgrade vehicles, and I think that’s why a lot of people are choosing to lease instead,” Caldwell said.