When Will Car Leasing Be Cool Again?

Republished By Plato

Followers: 0

In the years before the pandemic, new car leasing
accounted for 25-30% of all retail transactions, and market
penetration was as high as 53% in the luxury sector. But during the
pandemic, new vehicle leases fell to as low as 17%, and the
recovery has been slow. A market analysis of data from S&P
Global Mobility and TransUnion predicts leasing will return to form
when inventory levels creep nearer to traditional levels which then
leads to a need for increased incentives. But it has a long way to
recover.

At a time when a lack of vehicle
affordability is crushing household budgets, leasing should be
an effective way to lure shoppers with Champagne tastes but beer
budgets. Data from AutoCreditInsight from S&P Global Mobility
and TransUnion shows that leasing penetration has scarcely
recovered from its pandemic low, with just a slight rebound to
20.3% for CYTD 2023 through September.

The recent underlying lease trends are not healthy. While nearly
half of lease returnees opted to lease again in 2019, that number
dropped to 28% in 2022. What’s more, first-time lessees in 2022
were less than 30 percent of the leasing market.

This is bad news for dealers and OEMs, because fewer first-time
lessees decrease the long-term value of that consumer as a
potential returning customer – along with decreased opportunities
for certified pre-owned sales in the future.

Leasing and brand loyalty

To understand the decline in leasing, you must return to the new
vehicle inventory crisis of 2021. As new vehicle inventories
declined due to logistical issues and chip shortages, dealer
mark-ups rose, and consumer incentives disappeared. Dealers wanted
a profitable purchase transaction over leasing; consumers in need
of a vehicle were not in a position to negotiate and thus were not
presented with leasing options at the dealership.

The combination of these market conditions meant leasing was a
tertiary thought for everyone involved. As these tight conditions
retreat, the market will see a return of inventory and negotiating
power for the consumers – and leasing will again to be considered
by the dealers.

Because of the quick-turn nature of leasing, the strength of the
captive leasing incentive programs, and the likely return of the
vehicle to the original dealer – compared to a new vehicle that was
financed for a longer term – leasing carries far stronger loyalty
rates.

If one were to apply the lease penetration rate from 2022 to the
volume of 2023, it’s estimated that there would have been more than
630,000 additional vehicles leased. When applying the lease loyalty
lift vs purchase or finance, there would have been nearly 103,000
more transactions that likely would have stayed brand loyal,
according to S&P Global Mobility estimates.

To jumpstart the idea of leasing, manufacturers will realize the
need to re-start the incredibly valuable marketing machine they
created. But it will take baseline factors of declining interest
rates, pricing stability, and normalization of inventory
levels.

“Manufacturers were selling to the walls every month when
inventories were constrained, so they had no reason to offer
incentives. In fact, the most popular vehicles were regularly being
sold for over MSRP,” said Jill Louden, associate director
for AutoCreditInsight at S&P Global Mobility.

“The stars will align if manufacturers would turn on subvented
leasing once they are more comfortable with inventory days’ supply
and start to see increased competition. Leasing business flows
through their own captive finance companies as there is less
competition from other lenders in leasing,” Louden added.

Louden said subvented leases may seem short-sighted, but they
lead to loyalty to the brand. In fact, 79 percent of consumers who
lease again are make-loyal – which makes it prudent for dealers to
stay in touch with leasing customers to keep them from defecting to
another brand. This is especially true with luxury brands.

Consumer benefits of leasing start with a lower monthly payment
for the equivalent vehicle, approximately $175 less per month on
new non-luxury payments.

However, monthly lease payments have not escaped the
inflationary spiral in the retail car business. Lease payments
today are as high as finance payments were just a few years ago. So
instead of leasing, consumers are increasingly financing new
vehicle purchases for longer terms. Loans of 84 months have grown
from 5.4% of retail loans in 2021 to 10.4% in 2023, according to
S&P Global Mobility and TransUnion AutoCreditInsight
analysis.

Leasing also benefits OEMs by fostering a faster return to
market. Nearly two-thirds of lease households RTM within 36 months,
compared to 51% of purchase households. This can enhance brand
engagement, facilitate more opportunities to upsell or cross-sell,
and strengthen loyalty to the brand.

“With leasing, OEMs will see a competitive advantage for their
captive finance companies in segments and markets where the banks
and credit unions would not be as competitive or participate at
all,” Louden said.

Lease returns dropping in late ’24

However, the inventory constraints of the past few years will
delay the leasing party from starting up again anytime soon. In
fact, while expected lease terminations are expected to rise to
about 800,000 units by Q2 2024, they should steadily decline in Q3
and Q4, ending 2024 at fewer than 500,000 units, according to the
TransUnion consumer credit database.

As a result, unless prompted by external factors, recent trends
indicate that the popularity of leasing is several years away at
best, said Satyan Merchant, senior vice president for the
automotive line of business at TransUnion.

“Leasing will be in vogue again when manufacturers want it to
be, because leasing and lending incentives are determined by
inventories,” Merchant said. “It’s like the iPhone: People want a
new vehicle every few years and they can get that through auto
leasing.”

CHECK OUT OUR RTM AND LEASE-ENDING
DATA

LEARN MORE FROM
AUTOCREDITINSIGHT

CONSUMER LOYALTY TO FINANCE
COMPANIES FELL SHARPLY DURING PANDEMIC

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.