Leasing, older vehicle financing gain traction

Affordability challenges are prompting an uptick in leasing and financing of older vehicles as consumers look to lower their monthly payments. The auto finance industry is starting to push leasing again, Dan Brogan , national lease executive at U.S. Bank , told Auto Finance News . “The industry is realizing that leases have been a forgotten option the past few years with retail leading the charge and we are pivoting back,” he said. “We still have a way to go to the pre-COVID peak of 30%.” A higher percentage of prime consumers opted for leases in the fourth quarter at 28.1% compared with 21.2% in Q4 2022, according to Experian ’s Q4 state of the automotive finance market report. More near-prime and subprime consumers also leased vehicles in Q4 than a year ago. Lease distribution Q4 [caption id="attachment_58338390" align="aligncenter" width="1497"] Source: Experian [/caption] Increased days’ supply and a higher number of new-vehicle registrations are driving up leasing volume, Melinda Zabritski , senior director of automotive financial solutions at Experian, told AFN . "We've recently started to see leasing back again with more inventory,” she said, adding that leasing began picking up in the second half of 2023 and is likely to continue growing in tandem with more supply. More than half of borrowers who leased cars in Q4 had FICO scores above 741, while Michigan and New York held the greatest share of new-vehicle financing as a lease, according to Experian. Electric vehicles are part of what is driving an uptick in leasing. EVs made up 8.55% of new-vehicle retail sales in Q4, with 30.7% of EVs leased compared with 9.8% a year prior, according to Experian. Tesla , however, made up 2.73% of the top 20 leased makes in Q4 while Honda was the leading vehicle make leased at 11.05%. Lower payments on leases — compared with loans — are driving higher lease volume. The average prime lease payment rose to $611 during the quarter, up 2.4% YoY, with a term of 36.18 months on average, according to Experian. Lease payments were an average $132 lower than loan payments across the top 10 leased models in Q4. Leasing demand is up across U.S. Bank’s portfolio but the bank is prioritizing profitability over gaining loan and lease market share, Brogan said. “We're balancing higher demand with the amount of return we can get from a lease,” he said. “We are seeing applications come in but it's more a pricing function of the volume versus any other factor ... because of the tight capital environment banks are in right now. We will approve a creditworthy consumer, but [the deal] must have a certain rate profitability tied with it.” Financing older vehicles Leasing is gaining traction as consumers look to offset elevated vehicle prices and high interest rates , the same factors prompting more consumers to turn to older vehicles with lower price tags, Zabritski said. The share of financing for vehicles up to 8 years old rose to 86.4% in Q4, up 102 basis points (bps) compared with Q4 2022 but down 89 bps compared with Q4 2021, according to Experian. A higher percentage indicates more vehicles being financed are newer models, she said. “Many big banks typically finance a [vehicle up to 8 years old], and price based on the age of the vehicle,” she said. The volume of older vehicle financing was higher in 2021 largely due to incentives as manufacturers worked to get consumers back into stores following the onset of the pandemic, Zabritski said. Still-elevated used-vehicle values continued to push people into older cars in Q4 2023, but more new-vehicle inventory helped meet pent-up demand for new cars, she said. “Pent-up demand is pushing the [2023] rate to a bit newer, but as inventory continues to level out and maintain normal levels, we’ll continue to see older vehicles making up a larger portion of what’s being financed,” Zabritski said. U.S. Bank has seen more consumers looking to finance older cars in the post-pandemic era due to the rapid rise in new-vehicle prices and higher interest rates, Brogan said, noting that half of the bank’s portfolio is used. “It makes sense consumers are looking for [more affordable] options,” he said. “Consumers are looking at leasing recently and they are holding on to their vehicles longer or holding off on that new-car purchase for a used car.” Early-bird registration is now available for the Auto Finance Summit East 2024 , May 1-3 in Nashville, Tenn., which gathers lenders, dealers and fintech innovators in an event designed to bring the power of technology to a cross section of industry players. Early-bird pricing ends March 15. Visit AutoFinance.Live to learn more.

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