Car buyers avoid leases as offers and vehicles dwindle

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Fewer Americans are leasing new vehicles due to higher prices and scarcity of dealer lots, a decline that could reduce the supply of used vehicles and interested buyers in years to come.

The percentage of new cars and trucks leased during the Covid-19 pandemic has declined, falling to 19% of overall retail sales so far this year through March 13, the lowest since 2009, the company says. research JD Power. Rental accounted for about 30% of the broader retail market in the years leading up to the health crisis, according to company data.

The car shortage has prompted many automakers to drop the discounts and other types of promotions they typically offer to make leasing attractive to car buyers.

“Buyers are shocked by the stickers when they move out of one lease for another,” said Mike Maroone, general manager of Maroone USA, which has six dealerships in Colorado and Florida.

In some cases, leasing a luxury model now costs about the same in monthly payments as financing one, prompting more consumers to buy out their existing leases or pause their next vehicle lease.

For example, a 2022 Volvo XC90 rents on average for about $951 per month, or $8 more per month than to finance the vehicle, according to data from car-buying site Edmunds. In 2019, it was about $216 cheaper to lease than to finance the same model.

The decline in leasing is another way the U.S. auto market’s recovery since the early days of the pandemic has been hampered by a mismatch between supply and demand.

Higher lease rates also add to affordability concerns, as leasing has long been a popular option for consumers looking to purchase a new vehicle, but at a lower monthly payment than if they bought the car outright. .

Leasing is usually offered by the financing arm of an automaker, the entity that owns the vehicle and essentially leases it to the customer for a fixed period, often two to three years. At the end of the term, the customer can either buy out the lease at a predefined price or return it to the dealer. In the event of a return, the automaker usually resells the vehicle at auction.

Leasing has been particularly important for the luxury car market, where for brands like BMW,

Mercedes-Benz and Volvo historically account for almost half of their sales, according to data from JD Power.

While leasing generally remains cheaper, monthly payments increase faster than those of financed vehicles. In February, the average monthly lease payment was $560, about 19% higher than it was in the same month two years ago, according to Edmunds. The average monthly cost of financing a car was $637 in the same month, a 12% increase from February 2020, according to data from the car buying website.

To make a lease more attractive, car manufacturers often contribute money to the transaction. In the first quarter of 2020, automakers spent an average of $7,000 per vehicle to reduce leases, compared to about $4,200 per vehicle in financing, according to JD Power.

But such expenses can also reduce profits. Lately, with tight inventories, automakers have had less incentive to offer such promotions, executives and analysts say. Average industry spending on leasing has fallen 44% over the past two years, to about $4,000 per vehicle at the start of 2022.

Scott Keogh, CEO of Volkswagen Group of America, said he doesn’t expect leasing to rebound quickly to previous levels as automakers try to prioritize more lucrative sales.

“But don’t get me wrong, we’re not getting away from it,” Mr Keogh said. “I think it’s always a smart thing.”

For now, consumers like Schuyler Hunt, a 36-year-old Los Angeles resident, are looking for workarounds to higher rental costs.

Mr Hunt, who works in advertising, was about to return his leased Audi A3, planning to replace it with a hybrid or electric car. He said he knew he probably should pay more, but he was stunned to see most dealerships quoting him double his current lease payment of $360 per month.

“I laughed and I think I said something inappropriate,” Mr Hunt said, referring to a rental offer with a payment of over $700 a month. Instead, he said he bought out his lease on the Audi because he determined it would be cheaper to finance the car than to take out a new lease.

In some cases, leasing a luxury model now costs roughly the same amount in monthly payments as financing a model.


Photo:

David Paul Morris/Bloomberg News

The impact of such decisions is likely to have longer-term implications for automakers and dealerships, which rely on leasing to both boost business and help replenish used inventory. Already, the decline in leasing is being felt in the number of vehicles returning to dealerships.

In the fourth quarter of 2021, GM Financial, the financing arm of General Motors Co.

— reported its U.S. rental yields fell to 1% from 62% in the same period a year ago.

Executives and car dealerships say many customers are keeping their leases longer or buying them out at the end of their term, in part because they can’t find a replacement in the field.

“Leases create this wonderful steady stream of customers who need to come back into the market,” said JD Power analyst Thomas King.

Lease-out vehicles help ensure the used-car market has a steady supply of low-mileage models that are only a few years old. With fewer people renting, the pipeline is also disrupted, exacerbating the existing shortage of used cars on dealer lots, dealers say.

Rising interest rates could help reverse the current dynamic, making borrowing more expensive and pushing more customers to consider leasing, said Mark Templin, managing director of Toyota Financial Services USA.

“If you go back in history and look, rental fluctuates with interest rates,” Mr. Templin said. “When interest rates go down, people finance more. When interest rates rise, leasing will increase.

Write to Nora Eckert at nora.eckert@wsj.com

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