Industry report shows increase in number of fourth-quarter leases
When financing a new car, consumers have the option of a purchase or a lease. In the past a lease was usually reserved for very expensive cars or those used in businesses, where the payments could be a tax write-off.
But increasingly, new car shoppers are choosing a lease over a purchase, no doubt in large part to some attractive lease terms being offered on all types of vehicles. As a car dealer finance manager told me when I recently leased a vehicle, “manufacturers have figured out leases are great for business. In three years you'll be back for another vehicle.”
Perhaps, although I do have the option of purchasing my leased vehicle if I want. But he's right about the attractiveness to carmakers. Market data shows that people who purchase a car drive it an average of six years.
Having a low monthly lease payment and being able to trade-in for a new car in three years without much adjustment to the payment is attractive. And it turns out I'm not the only one thinking that way.
Leasing at all-time high
Experian Automotive reports more consumers are choosing to lease vehicles than ever before. In fact, the percentage of consumers choosing a lease over a purchase in the fourth quarter of 2013 was the highest since the company began reporting the data in 2006.
According to its latest State of the Automotive Finance Market report, Experian found 28.4 percent of financed vehicles in the fourth quarter were leased. That's up from 24.8% a year earlier.
The reason for the increase isn't really a mystery. A modest, mid-size sedan might have a lease payment of $189 a month with $2,000 due at signing. To purchase the same vehicle might require a larger down payment and a monthly payment of $500, if financed over the same three-year period. Longer finance periods would lower the payment but not anything close to the lease payment.
Lower payments a big draw
"Leasing continues to grow in popularity among car shoppers, especially those hoping to stay within a strict monthly budget," said Melinda Zabritski, senior director of automotive credit for Experian Automotive. "Our analysis this quarter showed that the average monthly lease payment was $51 lower than the average loan payment, which can make a big difference to consumers trying to stretch their dollar."
The average monthly payment on a new car purchase was $471 while the lease payment was $420. The latter may be higher because more expensive luxury cars tend to be the ones that are leased. But there are also plenty of vehicles that can be leased for $200 or less a month.
Car values have also changed, making a lease look a bit more attractive. The Experian Automotive reports shows the average new car financed in the fourth quarter cost $27,430. Amortized over four, five or even six years, that's a hefty payment, even with a low interest rate.
A lease, on the other hand, charges the buyer only for the depreciation on the car while they drive it. The monthly payment is based on the purchase price of the car and the residual value – what the car is worth – at the end of the lease. Because today's cars hold their value better, the cars are worth more after three years than they used to be.
For those buying a new car in the fourth quarter, it was a little easier to obtain financing. The Experian data shows the average credit scores for both new leases and loans were lower than the previous year.
The average credit score for a lease dropped the most, 16 points to 719 in the fourth quarter of 2013. The average credit score for new vehicle loans experienced a smaller drop, falling from 724 in 2012 to 715 in 2013.