Decline In Car Leasing Could Drive Up Used Car Prices and Financing Costs

Leasing a car has long been a popular option for people who want a new vehicle but can’t afford to purchase one outright. However, new data released in October 2022 shows that the car leasing market has seen a significant decline in the post-Covid period.

This decline is likely to have both short- and long-term consequences. In the short term, it may drive up prices for leasing a vehicle, and this price is already increasing. Over the next ten years, it will also mean that fewer used vehicles will be available, further driving up purchase prices and financing costs as well.

Car Buyers Don't Want To Lease

Car leasing is an important part of the automotive market, and has become a popular option for car buyers who want access to new vehicles without purchasing a depreciating asset – that is, a car. There are pros and cons of leasing, but many consumers are drawn to this ownership model by low monthly payments and downpayments (in comparison to a car loan), and the option to purchase the vehicle at the end of the loan term.

At a time when high inflation is reducing disposable income, it might be expected that leasing would increase in popularity. But that’s not what is happening. According to data released by Kelley Blue Book’s parent company Cox Automotive, leasing reached a modern peak in February 2019, when leasing represented nearly 34% of new-vehicle sales.

That share has been in decline for a number of years, but it’s recently decreased dramatically. At the end of 2020, about 26% of new cars were leased rather than purchased, according to Experian. And in 2022, Cox expects that leasing will represent just 19% of the new vehicle market.

There are a number of reasons for this decline:

• First, higher vehicle prices and rising interest rates mean that this year’s average lease payment is about equal to 2020’s average new-vehicle loan payment, reducing the cost saving that leasing has offered up until recently.
• Second, vehicle values rose significantly during the past two years, meaning that many leased cars are worth more than it costs to buy at the end of a lease. As a result, many more people are buying their cars at the end of their leases, and not returning them to the used car market.
• Third, the leasing market hasn’t responded very much to these factors except to increase financing costs. Leasing costs have risen almost as much as purchase costs, making leasing much less competitive.
  

Used Car Prices Might Increase

There are likely to be both short- and long-term consequences to this decline in the car leasing market. In the short term, the cost of leasing a car is probably going to increase further. In Q3 2021, The average monthly payment for a leased car was $506. Now, according to Cox, the average price for a lease is almost $650 a month.

Longer-term, the consequences may be more important. As more people buy cars at the end of their lease, fewer cars will reach the used-car market. This will be particularly important for the “certified pre-owned” market – which receives a lot of cars that have been leased from new. Fewer cars reaching this market will mean fewer choices for consumers, and potentially higher prices. And, with higher prices come higher auto loan costs since loan balances will be larger. That makes shopping for the lowest rate even more important when financing a new or used car.

These consequences will not be immediate. Cox expects, in fact, that they will not be felt until mid-decade. However, they also point out that “used prices may remain elevated for longer as demand slows from rising interest rates.” In other words, we could be looking at increased prices for used cars for a decade or more.