Auto Lease Volume Should Steadily Increase This Year

By Ray Birch

CINCINNATI—Credit unions should expect a U-turn in leasing penetration in 2024, as volume steadily increases, according to one analyst, who is crediting muted economic “turmoil” and consumers’ changing their perspective on car ownership for the shift.

“First, I am predicting a relatively turmoil-free year,” Scot Hall, EVP at Swapalease.com, told CUToday.info. “Said differently, no pandemics, no supply chain issues, no strikes, and better general economic factors—lower inflation and improving interest rates. Moreover, dealerships seem to be able to get inventory in most cases.”

Hall said leasing, much like the overalll economy itself, just had hurdle after hurdle to overcome during the last several years.

“One of those, of course, was COVID,” Hall reminded. “Everything shut down, and obviously was much further reaching than just the car business. Nobody really knew what to do or how to move forward. And then, as we slowly moved back toward normal, there were all sorts of problems with lingering supply chain issues. That became a problem. That was the next hurdle…And now, to our current environment, we've got relatively high interest rates. I say relatively high, because they’ve been higher before.”

Feel Even Higher

Those high rates, Hall pointed out, seem even higher to consumers now given how quickly they’ve risen from the rock-bottom rates of just a few years ago.

“That has been slowing car sales, as well,” he said.

With leasing penetration at 30% of all new car sales three or four years ago, the ratio has declined significantly to approximately 25% today. Hall forecast the higher interest rates and sticker prices will not combine to be immediate drivers of leasing’s comeback.

“Lease returns are expected to rise over the first three quarters of 2024,” Hall noted. “Essentially, these pending returns are the last big group of leases written before the pandemic and subsequent issues happened. Regardless of reason, rising lease returns should promote additional leasing because many of these lessees will need another vehicle and will likely continue in the leasing cycle…When people get into a leasing cycle they often remain with it, getting a new car every two-and-a-half to three years.”

Scot Hall

The Role of EVs

Moreover, Hall added,  as inventories rebound and factory-backed incentives increase, the market will see modest lease penetration gains. 

“On lease penetration, EVs are leased at a much higher rate than their ICE (internal combustion engine) competitors for multiple reasons,” Hall explained. “Unfortunately, for the leasing market, the EV market isn’t yet big enough to move the meter much overall. I think we'll actually see EVs become more and more affordable and less and less different (in price) than their ICE counterparts as time goes on. There will be a leveling. EV sales, as a percentage of the overall new vehicle sales in the U.S. is going to grow. We see the number commonly near 8%. But it's been growing dramatically and it might get to 9% or 10% this year.”

Hall believes what may the strongest factor in driving greater penetration by leasing is the evolving view of consumers when it comes to car ownership.

“It used to be people would say they don’t want to lease because they won’t own anything. You would hear that excuse all the time. And I would explain to people how when you finance, you don’t own the car until its paid off,” he said.

Lesson from Phone Business

Hall emphasized that with the average sticker on a new vehicle now at $47,000—which must be financed at higher rates—consumers have turned to longer and longer terms as they try to keep payments affordable, leaving buyers in a negative equity position and potentially never paying off the loan before they change into a new vehicle.

“So, today, I do think people are more open to leasing,” he said. “Leasing is becoming a lot more like the cell phone business—you're used to getting a new phone every two or three years. You want the latest and greatest technology. And you've kind of made the assumption you’re good with having that monthly expense. Also, you don’t want a monthly expense (loan) on something you may need to put a new engine in or might not start in the morning. I definitely think leasing will get more interest as cars continue to get more expensive and more sophisticated.”

Forecast for Modest Growth

Overall, Hall is forecasting modest growth in automotive leasing for 2024.

“I don’t believe we will get back to pre-pandemic levels (30%) in 2024, but I believe we will see some additional ground made and likely see lease penetration split the difference ending up in the mid-20% range,” Hall said. “Coupling increased lease penetration with additional unit sales annually should equate to a positive year for automotive leasing in the U.S.”