A man checking out the Ford Explorer price sticker at an international auto show.
It’s time to give leasing another look, as a way to achieve a lower monthly payment by $100 or more on average, experts said.
“As incentives grow and as OEMs produce more attractive lease offers, this will lead to higher lease penetration,” said Charlie Chesbrough, senior economist for Cox Automotive, in a recent webinar.
OEM stands for Original Equipment Manufacturer – an auto industry term for auto manufacturers.
The manufacturers’ “captive” finance companies, like GM Financial, Ford Credit, or Toyota Financial, traditionally account for most leases, because the manufacturers have traditionally put incentives on leases to sweeten the deal.
In leasing, instead of having the borrow the entire cost of a vehicle, the customer borrows only the difference between the upfront cost and the agreed-upon residual value at the end of the lease, usually at the end of 36 months.
Compared with a loan, leases on average require a lower down payment, and lower monthly payments.
The downside for the lease consumer is, they don’t get title to the car. They can’t sell it at lease end, to make a down payment on their next purchase.
For the past few years, the factories cut incentives on leasing during the worst of the pandemic, and then during a shortage of computer chips used in auto manufacturing. With low supply and high demand, there just wasn’t much need to offer discounts on leasing, or loans for that matter.
With little in the way of lease discounts, lease share fell. Leases typically accounted for an average of around 30%-plus of U.S. retail volume before the pandemic, but fell to only around 15% of retail sales volume in December 2022, according to Cox Automotive.
The U.S. Treasury gave leasing a big shot in the arm in December 2022, with a decision that made many electric vehicles eligible for a $7,500 tax break, but only if they are leased, not if they are purchased with a loan.
Lease share, which had fallen even lower among electric vehicles, is bouncing back. EV leases bottomed out at less than 10% of EV retail volume in January 2023, but grew to almost 24% in October 2023, Cox Automotive said.
For the U.S. market overall, Cox Automotive forecasts that leases will account for 23% of U.S. retail volume in 2024, up from 20% at the end of 2023.
“Leasing continues to be an attractive option for EV consumers, since it’s a loophole to receive the Inflation Reduction Act incentive,” Chesbrough said.
Leasing also produces lower monthly payments for other vehicles, too, not just EVs. For the Top 10 most commonly leased vehicles in the third quarter of 2023, Experian Automotive says in a separate report that the average lease payment was lower than the average loan payment by $129.
“For consumers that are interested,” Chesbrough said in the Cox webinar, “leasing is a great option.”
