While the engine behind the exceptional growth in new car sales is a hotly debated topic, leasing is proving to be an undeniable catalyst behind this year’s impressive new car sales numbers. Through June of this year, leasing accounted for 25.7 percent of new car sales, versus 22.2 percent in 2012. A decade ago, that number stood at just 17.5 percent.
Leasing saw a big jump in 2010, up to 21.3 percent of new car transactions, a nearly 5 percent rise compared to the prior year. Since 2010, leasing has been on a steady rise. One possible factor for this was that GM and Chrysler resumed leasing in late 2009, with the full effects of this becoming clear in 2010.
On the manufacturer side, OEMs are beginning to peg residuals at a higher number so that lower lease payments are made available for consumers. One TTAC source told us that a European luxury brand has spent close to ten figures buying down residuals to offer coveted “$299/month” lease payments on a popular model. An article in Automotive News explored this practice in the mainstream segment as well
Toyota is one of the risk-takers. It introduced the redesigned 2014 Corolla with low lease payments and residual values that are higher than those of the previous model. Toyota is betting the 2014 Corolla will be worth 63 percent of the sticker price three years from now compared with 53 percent for the 2013 model.
There is risk for the auto makers who go with a high residual. If the vehicle turns out to be worth less than the residual used by the automaker, it could cost the OEM money. But by pegging the residual value higher, customers can borrow less money (since they borrow the difference between the vehicle’s cost and its expected value after the lease term), allowing for lower payments. Keeping the monthly payment low has been a crucial element of auto financing in the post recession era.
Average transaction prices for new vehicles have topped $31,000 while the prosperity of Americans has not seen proportionate increases. Census data shows that the average income for a family has fallen 8 percent since 2007, with no growth occurring in 2012. Understandably, many consumers are put in a financially precarious position when it comes to paying for a new vehicle. Used car prices have also risen to the point where buying a second-hand vehicle is no longer as attractive as it once was. In response, vehicle loan terms have gotten longer, so that consumers can keep their monthly payments manageable despite having to finance increasingly expensive vehicles. The average term for a new vehicle loan in Q2 of 2013 was 65 months. On the other hand, subprime delinquencies have remained on a downward trend and commercial banks are looking to get in on the action as securitized loans are one of the few products providing yields in an era of ZIRP.
An expansion in consumer credit has been one of the underlying themes in the growth of new car sales and auto financing in recent years, but the spike in leasing, and the emphasis on keeping payments low is worth keeping an eye on, if only as an indicator of a larger macroeconomic trend. Cars are getting more expensive and increasingly out of reach for many. But as long as there’s a way to keep it “affordable”, even if it means leasing, not buying, or incredibly long loan terms, then new car sales can keep soaring to record heights.