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

Car leasing has long been a popular option for people who want a new vehicle but can’t afford to buy one immediately. However, new data published in October 2022 shows that the car leasing market has suffered 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 could lead to an increase in the price of leasing a vehicle, which is already rising. Over the next ten years, it will also mean that there will be fewer used vehicles available, further increasing purchase prices and financing costs.

• 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 buying a depreciating asset.
• New data published in October 2022 shows that the car leasing market has experienced a significant decline in the post-Covid period.
• In the short term, this could make leasing more expensive. In the long term, it could make buying a used car more expensive.

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 buying a depreciating asset, i.e. a car. Leasing has its advantages and disadvantages, but many consumers are attracted to this ownership model because of the low monthly payments and down payment (compared with a car loan) and the possibility of buying the vehicle at the end of the loan term.

At a time when high inflation is reducing disposable income, one might expect leasing to gain in popularity. But this is not the case. According to data published by Cox Automotive, the parent company of Kelley Blue Book, leasing reached a modern peak in February 2019, when it accounted for almost 34% of new vehicle sales.

This share has been declining for several years, but has recently fallen dramatically. By the end of 2020, around 26% of new cars were leased rather than purchased, according to Experian. By 2022, Cox predicts that leasing will account for just 19% of the new vehicle market.

There are several reasons for this decline:

• Firstly, rising vehicle prices and interest rates mean that the average lease payment this year is almost the same as the average loan payment for a new car in 2020, reducing the cost savings that leasing offered until recently.
• Secondly, vehicle values have risen considerably over the past two years, meaning that many leased cars are worth more than the purchase cost at the end of the leasing contract. As a result, more and more people are buying their cars at the end of the leasing contract and not putting them back on the used car market.
• Thirdly, the leasing market has not reacted much to these factors, apart from increasing financing costs. Leasing costs have risen almost as much as purchase costs, making leasing much less competitive.

Used Car Prices Might Increase

This decline in the car leasing market is likely to have both short- and long-term consequences. In the short term, the cost of leasing a car is likely to rise further. In the third quarter of 2021, the average monthly payment for a leased car was $506. Today, according to Cox, the average leasing price is almost $650 per month.

In the long term, the consequences can be more serious. As more and more people buy cars at the end of the leasing contract, fewer cars will enter the used car market. This will be particularly important for the certified pre-owned market, which is home to many cars that have been leased from the outset. Fewer cars in this market will mean fewer options for consumers and possibly higher prices. And with higher prices, auto loan costs will be higher, as loan balances will be higher. This makes the search for the lowest rate all the more important when financing a new or used car.

These consequences will not be immediate. In fact, Cox doesn’t expect them to be felt until the middle of the decade. However, he also points out that “used car prices could remain high for longer, as demand declines due to rising interest rates”. In other words, we could see used car prices rise for a decade or more.