In 2019, leasing should remain as a healthy, viable form of dealer-arranged financing. While lease penetration has slipped to the 29% region, down from 31% a little over a year ago, leasing should enjoy another solid year of activity in the next 12 months.
There are a few factors driving this:
1. Leasing works. Most notably, leasing remains as the single-best way to match car shoppers with their desired vehicle and price point. Regardless of the talk of some domestic makers reducing their incentives on lease deals, even in these scenarios, monthly payments on leases are still more favorable than financing the entire vehicle.
2. Off-lease units sell. The scare of off-lease inventory never materialized. The narrative back in 2017 was that the industry should pull back on leasing because all of the lease returns would tarnish residuals on many vehicles. What we’ve learned is that much of this gently-used off-lease inventory was in hot demand throughout 2018. Lease activity doesn’t hurt the long-term prospects of a vehicle’s value.
3. Interest rates are on the rise. Interest rates continue progressively rising and new-car loans are at an eight-year high. This is also a large factor in why many new-vehicle lease deals are beginning to decline. Despite this, leasing is now more popular than ever, particularly among frugal consumers trading in their sedans for pricier trucks and SUVs. What’s more, rising interest rates will have a more adverse effect on long-term loans, prompting many customers to continue leasing and keep payments low.
However, lease prices are certainly rising along with interest rates. For example, a subcompact Kia Forte sedan that has been leasing for the last several months between $119 and $139/month in select markets with down payments in the $2,000 range is now going for between $149 and $189/month, with down payments in the $3,000 range. A Toyota C-HR crossover SUV that was leasing for $149/month now leases for between $169 and $199 with similar expenses due at signing.
The point is that, even with certain lease prices rising, they’re still the most affordable option in transaction compared with a long-term finance. What’s more, thanks to Apple conditioning millions to upgrade their mobile devices every two years, people are now finding parallels in how they acquire transportation. With the more frequent advancements in vehicle technology — particularly in safety, entertainment, and hybrid and full-electric vehicles — people see great value in trading up every few years.
What to Expect in 2019
Incentives will remain in 2019 on lease deals, but they may begin to appear more locally. We’re observing more area-dependent fluctuation in leasing terms than usual. As it is, automakers often adjust their incentives (including cash rebates, discounted financing, and promotional lease deals) in certain U.S. regions to address local supply and demand issues.
Case in point: In the Los Angeles area, a Chevrolet Silverado 1500 pickup truck (specifically the Double Cab 4WD LT with the All-Star Edition package and 4.3L V6 engine) is leasing for $259 a month for 36 months with $4,759 due at signing. However, in the Chicago region, the same vehicle is offered for $199 a month for 24 months with $4,969 due at signing.
Leasing should remain a significant finance option at your dealership and F&I programs in 2019. Even with rising interest rates and fewer incentives on a nationwide level, in most cases, leasing will still be the most affordable way to help your customer match up their desired vehicle with their targeted budget point. And now that we know off-lease inventory has not adversely affected residuals and demand, that is no longer an excuse to shutter lease offers.
Scot Hall is executive vice president of operations for online lease marketplace Swapalease.com. Contact him at [email protected]