HAUPPAUGE, N.Y.—Members walking into the car dealership in 2018 may be in for a shock, at least those who rely on leasing to keep the monthly payment affordable.
With the influx of all the high-quality cars coming off-lease now, used values are falling faster and driving down residual values carmakers set for their lease deals.
GrooveCar SVP Frank Rinaudo said that members who took out a lease three years ago—about the time leasing began rising to a point where it now comprises more than 31% of all new car sales—will likely be disappointed if they expect a similar payment on their new model.
“For example, one credit union member who leased a Honda CRV three years ago and just turned it in was looking for about the same payment on her new lease,” explained Rinaudo. “But the residual on the CRV has decreased substantially. So, three years ago her payment was $275 a month, with $3,000 out of pocket. Now her payment, with the same out of pocket expense, will be closer to $325. That is a substantial increase. With all these cars coming back the residuals are dropping.”
Stalled For While
Rinaudo believes the higher payments will stall leasing’s growth for a period.
“I think that leasing’s growth will level off in 2018 and 2019,” he said. “We won’t see the dramatic growth we have seen in the last five years. However, I do expect leasing to pick up again and reach 33% to 34% of all new car sales down the road.”
Another factor: Rinaudo believes that the carmakers will not enhance residual values on leases like they have in recent years.
“Artificially enhancing the residual lowers the payment for the consumer,” Rinaudo noted. “The manufacturers are in the business for one reason—putting new cars on the road. So, sometimes they will enhance the residual and take on more risk.”
Frank Rinaudo
If leasing slows in the next two years, Rinaudo believes that the amount of long-term financing will increase. Analysts have suggested that lenders are going out too long on loans—some above 90 months—in order to help borrowers lower their monthly payment. Experts believe this could lead to a wave of defaults in the coming years, especially as negative equity in autos reaching record levels.
Another option that may begin to be promoted more by dealers is leasing of high-quality, pre-owned vehicles, noted Rinaudo, who added that used car leasing has not been a very successful in the past.
“This is another avenue to dispose of lease vehicles coming back,” said Rinaudo. “It works the same as new vehicle leasing. One major difference is there are no rebates or customer cash on used vehicle leases. That’s why payments are not very competitive.”
Higher Used Vehicle Residuals
Rinaudo added that new vehicle lease residuals are usually higher than pre-owned, and the big reason is that the cars are all unique.
“New vehicles are consistent, they are brand new and do not have damage, do not have any mileage. All pre-owned vehicles are different,” he said. “They have varying damage, mileage . . . The lender relies on the dealer for their accuracy regarding the condition of the vehicle. Remember, the lender owns the vehicle at lease end.”
Rinaudo said he is unsure how well used leasing will fare in the next year or two.
“In the past the results have been very disappointing. More vehicles are coming back, but pre-owned leasing growth still remains flat,” he said.