With the number of off-lease vehicles coming into the used car market projected to grow in the coming years, it might be the time for used car leasing to make a return, which would boost demand and price at wholesale for several used car segments, according to Swapalease.com.
"I would absolutely think that this will increase the demand on some of these vehicles on the stage of remarketing," said Scot Hall, EVP of operations for the company. "Those vehicles that would make attractive used vehicles will definitely see an uptick in the value of those cars on a wholesale basis, no doubt about that."
Lease penetration rates have seen year-over-year growth for the past four years, according to Edmunds data. In 2016, a record-high 31% of all new-vehicle transactions were funded through a lease — meaning for every three new vehicles sold, one was a lease.
The results of these higher penetration rates were projected, and have, already taken effect on the used car market. Earlier this year, Cox Automotive Chief Economist Jonathan Smoke noted that Cox had seen a rise in off-lease vehicles entering the used market in the latter half of 2016 and the early part of 2017. One of the largest dealer groups in the country, Asbury Automotive noted in a quarterly earnings call that the influx of off-lease vehicles had affected its used car prices.
Used car leasing is exactly what it sounds like: allowing a buyer to opt for a two- or three-year lease for a used car instead of more traditional five- to six-year loan.The benefits to the buyer would be another method of buying a car at a more affordable price at the expense of not keeping the car at the end of the term, similar to a new-vehicle lease.
How this would benefit vehicles at auction would have everything to do with residual values.
Used car leasing may not be very prevalent today, but that wasn't always the case.
In fact, prior to the Great Recession, used car leasing was much more prevalent. Swapalease.com may best be known for being an online lease marketplace, but it also has some ownership in a large dealership in Ohio. And, during this pre-recession era, this dealership used to sell used car leases. However, after the recession, Banks pretty much stopped all used car leasing immediately following the recession, fearing the risk that the practice could bring, Hall noted.
Used car leasing did have some risk attached, much of it stemming from unrealistic residual values being set on certain cars, Hall noted. This resulted in those vehicles not holding their values as well as banks expected, hurting the profits that would come from those used car leases.
Where this could be corrected — if used car leasing makes a return — is by only allowing vehicles that retain strong residual values to be offered through a used car lease. And, with all of the two- to four-year-old vehicles expected to return to the used market, dealers will have an ample supply of viable cars for a used car leasing program.
The types of vehicles Hall expects to be most viable for used car leasing, and see a boost in price and demand at auction, are near luxury and luxury vehicles, as well as SUVs, crossovers, and trucks.
“These will be the vehicles that leasing companies or residual companies will want to take a strong look at to see what they might be worth at the end of their used leases,” said Hall.
A few specific vehicles that he expects to perform better at auction will be: the Audi Q5, BMW X3, Porsche Macan, Cadillac Escalades, and GMC Denali and Yukon. Hall expects non-luxury trucks, SUVs, crossovers, and trucks to also see a boost, however, luxury versions will yield the most benefits. The reasoning for this is due to the fact that used car leasing will allow buyers to get into a luxury vehicle that they might have not otherwise been able to afford. Given that payments for a used lease would be more attractive, shopper demand may be stronger than expected, he noted.
If used car leasing does become more prevalent, and the practice does become a boon for used leasing, it would ring good news for a segment that has not been performing well at wholesale for some time. Since about July 2015, luxury wholesale prices have been a sharp decline, according to Black Book.
“Dealers are going to need to supply their lots from somewhere so that is going to ultimately help shore up those used vehicle values, possibly even create some higher values if here is a steady stream of used car leases, in order to create a second life for certain vehicles,” said Hall.
The biggest driver toward a more widespread practice of used car leasing will be the continued growth of leasing, Hall noted. As more people lease, more used cars will return to market at a faster, leading to an ample supply of desirable used vehicles for a used-vehicle leasing program.
Additional drivers will be the continued rise in new-vehicle transaction price. Higher new-car prices will lead to higher used car pricing, leaving used car leases as more affordable avenue for budget-conscious buyers. And, as newer technology is added to cars, more consumers will want to swap out their vehicles at a more frequent pace; making the shorter terms available through a lease more attractive to these buyers.
While he doesn’t have a crystal ball, Hall doesn’t see it as unreasonable to think that used car leasing could account for 10% of used car sales within the next four to five years.