The allure of leasing over traditional financing has historically been that a customer can drive a more expensive car for a lower payment.
That’s because, for leasing, the amount being financed is not the total price of the vehicle, but the difference between the price and the value at the end of the lease. Let’s say a $50,000 vehicle is worth 40 per cent of the original price after four years. The customer is financing the difference — 60 per cent — over the four-year lease period. Perhaps more significantly, sales tax is paid only on that 60 per cent, added to each lease payment instead of due all at once, upfront, which can really sting.
Whether leasing is the right choice requires weighing a number of other factors, from the interest rate to the number of kilometers driven. For example, if a customer is paying for 80,000 kilometers of use over four years but drives only 30,000 because they are now working from home, did they waste money? And if they go over 80,000, they pay. There’s a lot of fine print in a lease, and for this game, the house always wins.
I could spend a whole column getting into the weeds on leasing vs. financing, but the point is to provide a bit of background for this next bit: Leasing is losing its luster. According to a Page 3 story, leasing penetration slides to 20 per cent in the second quarter of 2023, from 30 per cent in the fourth quarter of 2020. The reasons vary from higher interest rates to increased home values, which increases the amount available in home equity credit lines, enabling more cash purchases of vehicles.
That leaves dealers with a problem. One of the reasons they like leasing is that customers have to return to the store at the end of the lease period, providing the golden opportunity to get them into another vehicle.
That is unless customers choose to buy out their leases because the residual values are a lot lower than the market value, which is what’s happening now. And those leases are being bought out with that newfound headroom in home equity credit lines.
While this constitutes a sale, the customer has less reason to return to the store. The purchase cycle is broken. And that? That’s a problem.