Guest commentary: Surge in leasing numbers an opportunity for dealers

After an extended period in which the auto leasing market struggled and more consumers turned to other options such as used cars, leasing is bouncing back. It's incumbent on dealers and lenders to make the proper adjustments in both marketing and consumer outreach to take full advantage of this shift.

A recent TransUnion study, "The State of Auto Leasing: Current Trends and How to Leverage Them In the Future," found the ratio of auto loans to leasing is beginning to tick up, looking more like what was seen in 2020 than like the post-pandemic lows of late 2021 and 2022. In fact, from Q1 2023 to Q1 2024, leasing volumes increased from 539,000 to 714,000 — a figure much more in line with the 781,000 in Q1 2020.

The research also showed a corresponding regression in loan originations as consumers consider their choices with leasing options now available.

The credit scores among all of these groups were similar. Each group saw a similar payment increase over their previous payment. Those who leased a new vehicle saw an increase of $120 a month as opposed to their previous vehicle, while those who financed a different new or used vehicle saw increases of $213 and $62. However, as monthly lease payments are typically lower, those who leased continued to see lower average payments — $707 per month for nonluxury financed vehicles vs. $517 per month for nonluxury leased vehicles.

Now, while leasing has increased across the auto industry as a whole, among electric vehicles that increase has been even more pronounced in recent years. This ultimately has gone a long way toward reshaping the EV origination market. In fact, the ratio of EVs leased versus financed has almost flipped on its head over the last three years.

In Q2 2021, 55 percent of EV originations took place in the form of financing while only 21 percent of EVs were leased. The remaining 24 percent of originations were cash purchases or some other type of purchase (trade-in, etc.). However, in Q2 2024, nearly 50 percent of EV originations came in the form of leasing with less than 35 percent being financed. It's clear that among EV buyers, leasing is now the preferred origination option.

The driving facts we observed for this rapid growth of leasing among EVs include:

• After a period of diminished inventory among EVs at dealerships, the supply stabilized and then rose.
• Similarly, after a stretch of time in which leasing incentives across the board were down, those have returned. In addition, there are added dealer incentives specific to EVs.
• Beginning in 2023, a new series of tax credits were applied for those who leased EVs.
• More EV options were introduced, many of which came in at a lower leasing price point for consumers.
• Consumers began demonstrating an increased preference for lower or maintenance-free EV leasing options.
• Rapidly evolving technology in EVs means consumers are looking to shorter-term leases rather than financing.

One red flag did emerge in these findings and is one dealers must pay attention to moving forward. While leasing as a whole appears to be bouncing back, it is not yet penetrating potential first-time lessees at a rate commensurate to that before the pandemic.

A higher percentage of those leasing today have done so before and are already familiar with what it entails and how they can benefit from the incentives. In fact, year-to-date in 2024, only 30 percent of auto leases can be attributed to first-time lessees, down from 33 percent in 2019.

Fewer consumers are choosing to become first-time lessees. This is a challenge in that it ultimately decreases the lifetime value of those consumers and limits future opportunities for dealers. However, it also represents a real growth opportunity for dealers moving forward.

Consumers looking for a pre-owned vehicle the rest of this year and into 2025 may find fewer lease returns, but they still are interested in a car with a lower monthly payment than if they financed a new vehicle.

That's a group dealers should consider trying to turn into first-time lessees and should aggressively market toward. This begins with background research up front using tools such as TransUnion TruAudience to help identify potentially viable marketing opportunities. This can help maximize ROI and more refined messaging to these potential lessees, getting them interested and ultimately engaged in leasing as an option.