CINCINNATI—Could leasing surpass 40% of new car sales in the coming years?
One leasing expert contends it’s possible, and a big reason for the potential growth is the ever-increasing terms on automobile loans as buyers seek to keep payments low even as new car prices keep rising.
Scot Hall, executive vice president of Swapalease.com, reminded the longer terms are only contributing to the much higher cost of car ownership due to greater maintenance costs as people keep their cars longer—often because they have little choice due to the negative equity that can last for years. Swapalease.com data show the price tag is an extra $8,422.73 out of pocket over the 15-year period for the consumer who takes out loan versus a lease.
“In five to 10 years, I don't think it's unrealistic for leasing to grow another 10 percentage points,” said Hall, noting leasing now accounts for approximately 30% of all new car sales. “Considering some of the higher-end carmakers, like BMW, already show 50% of their sales are leases, that is not a stretch at all. Cars are just getting so expensive, and the heavy intertest in leasing we see in the more expensive cars will begin to filter down more to the every-man-makes soon enough. Forty percent leasing penetration in five to 10 years is very possible.”
Being ‘Realistic’
Hall said the longer terms just keep adding to the negative equity in cars.
“Finance experts say it is wiser and cheaper to own your vehicle, rather than leasing one. Maybe that’s true if you buy a used car and then drive it for 10 years,” said Hall. “But how many people realistically do that today—when everyone wants the latest technology…”
Hall said Swapalease.com looked at what would happen if someone financed their vehicle over a 15-year period, versus someone who continued to lease over that same time frame.
“We compared someone who financed and leased the same vehicle at the same sales price and interest rate, with the person financing and trading in every 60 months on a 84-month term for each vehicle,” said Hall. “The lessee turned their vehicle in every 36 months and then leased again.”
Hall said many consumers believe financing their vehicle is a better financial choice than leasing.
Scot Hall
“But there is a big difference between financing a vehicle and owning a vehicle,” said Hall. “When you look at an apples-to-apples comparison, assuming you trade in your car before term, the negative equity can really end up costing you in the long run. We included extended warranties as well as estimating for repair cost on the purchase side. Of course, you don't have those costs to contend with on the lease side.”
The Big Expense
The big expense is the negative equity that rolls into the next loan, with Swapalease.com data showing the average negative equity on the first trade is $1,500, then $2,500 when the second car is turned in, and $3,500 when the third car is traded in 15 years.
Hall also said the average maintenance costs for a car after 36 months averages out to about $75 a month.
“You just have more repairs as you hold onto cars longer and you have a much greater chance the repair could be extensive, like a transmission,” he said.
Hall believes lenders, including credit unions, could help drive leasing penetration higher and help stem the rising tide of negative equity building up in new--and even used--cars today. As CUToday.info has reported, negative equity in automobiles has risen to record levels. Many analysts have expressed concern for lenders over the potential for rising delinquencies and defaults, especially should the country ever experience any kind of recession.
A Role for CUs
Hall thinks credit unions could play a bigger role in leasing—as many do not offer the option—since they look out for the best interest of their members.
“Credit unions play a much more significant role in the financial lives of their members than do banks, and certainly much more than the finance companies,” said Hall. “Leasing could be the answer for members who continue to struggle with negative equity in their cars, and leasing could be a way for a member with low or middle-of-the road credit to rebuild their credit. They could get a much more affordable monthly payment with a lease, as opposed to a higher-rate loan, make the payments and get their credit back on track.”
A Changing Mindset
Hall further believes leasing increasingly reflects the changing mindset of car owners.
“Many people don’t care as much anymore about owning a car, especially Millennials,” he said. “As we know, more people are looking at car subscription services and even ridesharing. The automotive industry is changing and greater use of leasing will be part of that change.”