Vehicle leasing is having a moment

Overall costs from high interest rates, insurance premiums, and historically elevated prices are changing the way many Americans are approaching car buying. Lower monthly payments are the magic bullet for many consumers, and leasing is re-emerging as a key way to reduce payments and turn over inventory.

By the numbers: Lease agreements made up 24.1% of new car purchases in Q1 2024, a meaningful rise from 19.3% in Q1 2023, according to Experian. The key driver? Lower monthly payments.

Recently, CarsDirect found lease deals for the Equinox EV (2LT) for $379 per month with a $3,189 down payment for a three-year term. Deals like this are all over the place, and it makes sense why.

Zooming in: In June, the average monthly payment for a new vehicle exceeded $756 according to Cox Automotive. This translates to a 37.2 median weeks of income needed to purchase a new car - an increase of 0.1% from May. This is despite a jump in new vehicle inventory to 2.91 million units as of July 8, said Cox Auto. 

• The culprit is a familiar suspect: interest rates. Auto loan rates (both new and used) hit a 13-year high of 9.83% in June, a year-over-year increase of 8.7%.

• Interest rates are not only crunching consumer wallets but dealers' as well. Higher inventories and rising floorplan costs are putting a dent in dealership profitability.

• But incentives (especially on EVs) are offering some relief. Average incentive packages offered on new vehicles rose 53% year over year in June, according to Motor Intelligence.

While credit criteria is tightening, leaving some borrowers on the sidelines, it’s also creating an opportunity for lenders willing to look at alternative financing options, like leasing.

• U.S. Bank is seeing "very strong" leasing activity, said John Stern, Chief Financial Officer, and is waiting for an opportune moment to re-enter the auto loan market in a meaningful way.

• Ally Financial originated $639 million in EV and hybrid lease deals in Q2 2024, with 64% of total EV originations being leases. Way more than in years past, according to Auto Finance News.

• GM Financial lease originations for the quarter ending June 30 rose 8.2% from a year ago, reported Automotive News.

Bottom line: Leases could be a solution for dealerships struggling with high inventory levels as they can clear out excess stock and lower floorplan expenses. But a glut of off-lease vehicles flooding the used car market could impact resale values in a couple of years.

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