According to a recent FORTUNE Magazine article vehicle leasing is on the rise. Part of the recovering U.S. auto market is due to the increasing number of vehicles being leased instead of purchased outright. Lease financing has always been a strategy used to acquire luxury brands, now non-luxury buyers are utilizing this financing tool.
According to Edmunds.com, leasing reached 22% and this year it could exceed 25%. The reason for this trend- low interest rates and strong pricing for used cars.
The recovering U.S. auto market has been characterized, in part, by a rising percentage of customers who are leasing cars, notably non-luxury buyers. Last year the percentage of those leasing reached 22%; this year it could break through 25%, according to Edmunds.com. Low interest rates and strong pricing for used cars are two factors behind the trend.
Younger buyers are attracted by lease deals because they can easily understand a monthly payment and the simplicity of returning a vehicle after a set period of time — versus a fixed price that is complicated by a down payment and several financing options. Many also like the option of buying the car at a set price at the end of the lease period.
Monthly payments for lease vehicles are usually lower than payments for purchased vehicles that are financed with a loan. However, if a motorist decides to drive a car for six years or more, the purchase of a slightly used vehicle is usually more cost-efficient than new or leased vehicles.
A vehicle lease is an agreement whereby a third-party financial institution owns the car, the user of the vehicle agreeing to pay a monthly rate and return the vehicle after a specific period of time, with no more than a set number of miles on the odometer. The agreement usually contains a financial penalty for exceeding the mileage limit.
Larry Dominique, president of ALG, a company that tracks residual values and lease rates, said, “We have seen automakers that traditionally didn’t lease, such as Hyundai and Kia, are embracing the practice due to increased residual values.” Rising quality and tight availability of Korean brands has raised transaction prices of new vehicles, making used vehicle prices stronger as well.
ALG is bullish on the continued increase in the strength of residual values, which comes from rising demand for vehicles. Used-car supply is tight, Dominique said, “which is causing an unnaturally high value on used cars. We don’t expect the supply of used cars to return to where it was in 2007 [when the car market tanked] until 2017.”