How the leasing market is changing
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Many drivers choose to lease vehicles for the ability to switch out their car more frequently and to avoid any serious financial commitment. But while leasing is a popular option, there has been a decline in availability.
At its peak, almost 30 percent of retail sales were leased vehicles between 2015 and 2019. The lease share is now closer to 20 percent, according to Cox Automotive. This decline should give pause to those considering a lease, as it may cost more.
Why has vehicle leasing decreased?
Leasing has hit a decline for three primary reasons, all triggered in part by the pandemic and supply chain issues that followed.
1. Leasing has become too expensive
One of the most attractive aspects of leasing is the lower monthly cost that it offers when compared to buying an equivalent car. Typically leasing costs much less because you are only paying for the vehicle depreciation incurred over the length of the lease, the rental cost and taxes — and possibly some fees. On top of this, leasing historically carries a lower upfront cost compared to buying.
In the second quarter of 2022, for example, leasing a Honda CR-V cost $125 less to lease than buy, according to Experian. But as vehicle prices have increased, leasing no longer holds a less expensive monthly cost. In the last year, drivers paid on average the same amount to lease a car as one spent on a new vehicle loan in 2020, according to Cox Automotive. For many, this expensive cost negates the primary benefit of leasing and leaves it out of the question.
2. Increased number of lease buyouts
With fewer vehicles available at dealerships and more expensive out-the-door prices, many are choosing to hold on to their leased cars instead of signing off on a new one. This process is known as a lease buyout.
By keeping ownership of the vehicle, consumers were able to avoid the competition of the leasing market and the higher vehicle prices to buy. But as more drivers sign off on lease buyouts, fewer vehicles have returned to the leasing ecosystem. This interference in the leasing cycle intensifies the lack of available vehicles.
3. Fewer leasing incentives
With fewer vehicles available on the market, dealerships must make back any money lost in other ways. One of these ways is by removing any incentives that would have previously been present. This is especially true when it comes to vehicle leasing. So with higher costs and fewer incentives to sweeten the deal, leasing loses much of its luster.
Buying used might be more expensive
The shift in the leasing market will create ripple implications for buying used vehicles as well. When more drivers hold onto their leased cars, it limits the used market to a degree. Leased cars that don’t get recirculated to be leased again often end up on the used car market. As there are fewer of those vehicles reentering the round, there will likely be fewer used cars to purchase.
If you — like most drivers — do not have the privilege of waiting to buy, consider how to buy in a high-cost environment. Taking the extra step to apply for preapproval or adding a cosigner can save you money in the long run.
Should you lease or buy in 2023?
The choice to buy or lease comes down to your personal preference and needs. Consider the primary differences between leasing or buying your next car.
|Cost||Leasing tends to carry lower monthly payments and less money put down initially.||You might have to put more money down initially and spend more each month.|
|Ownership||You will not fully own the vehicle unless you follow up with a lease buyout.||Once your loan is paid off you have full ownership of the vehicle.|
|Restrictions||You will have restrictions on the number of miles you drive throughout ownership, usually between 10,000 to 15,000 miles.||There are no restrictions on the vehicle on mileage or other limitations on driving.|
|Additional costs||Depending on the lease you likely will pay “wear and tear” fees based on general vehicle upkeep.||You will be responsible for any long-term maintenance costs that come up during ownership.|
While either option comes with its own set of benefits and drawbacks. Regardless of which you choose, prepare to spend more over the next year. This is especially notable for leasing, as it, unlike in the past, could cost close to the monthly cost to buy a vehicle.