How does the inventory shortage affect leasing? , News

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Leasing during the inventory shortage | Cars.com illustration by Paul Dolan

The persistent shortage of inventory has left no corner of the auto industry undisturbed in its wake. The demand for new cars is higher than the capacity of car manufacturers to continue building, and the inventory of used cars is shrinking even as prices rise to record levels. Some retailers have the luxury of waiting for the ordeal, but others have no choice but to dive into turbulent waters. As manufacturers’ incentive measures fall and transaction prices continue to rise, the shortage of inventory has also shaken auto-leasing.

Related: How does renting a car work?

If you are considering leasing a car in the coming months or you have a lease that expires soon, here is how the current situation will affect car choices, monthly lease rates and lease buyout.

Lease options shrink, prices inflate

Leasing a car is typically equal to a lower monthly payment than financing the same purchase, but the shortage of inventory is equal. dat pragmatism on the head. According to Tyson Jominy, JD Power’s vice president of data and analytics, the lack of inventory is not only a shrinking cash price for a car purchase – it is also raising lease prices.

“Leasing is currently being challenged in a way that has not been seen since the Great Recession,” Jominy said. “Several factors contribute, however [the] The leading cause would be the lack of inventory that pushes prices up, which may negate the payment advantage that leasing traditionally has over loans. In fact, it is not uncommon now for a loan payment on a Porsche Cayenne or [Land Rover] Range Rover Sport to be cheaper than the monthly lease payment. ”

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Cars.com photo by Kelsey Mays

Lease or buy?

Michael Sin, co-founder of Leasehackr, agrees that leasing used to be an obvious choice for auto shoppers looking for lower monthly payments, but that is no longer the case.

“For the car shortage, leasing was a no-brainer for many customers,” Sin told Cars.com. “That was because manufacturers overproduced cars; they were basically giving them away and presumably losing money on them. … Well, I would say leasing may still be an option, but it is no longer a no-brainer for most models.

The reasons for this shift come down to a combination of factors: higher MSRPs, reduced incentives and increasing rates for the money factor, the equivalent of an interest rate for a lease.

“What’s even more challenging is that many companies in captivity are pulling back on incentives and discounts,” Sin said, referring to the customer financing arms at most automakers. “You used to see a lot of dealers’ money – [for example] $ 2,000 discount on a lease. That all has basically disappeared. You also see higher interest rates – on a lease, this is called the money factor. They are simply not supported as before. Prior to the lack of inventory, you would see money factor rates close to 0%, which means you do not pay interest on your lease; now it’s back to the market rate, that can be 1% … 2% … even 4% – it’s much higher.

Sam Fiorani, vice president of global auto forecasting at analytics firm AutoForecast Solutions, reiterates the trend of declining lease incentives and more expensive financing.

“Lease rates stand on just as transaction prices go up,” Fiorani wrote in an email to Cars.com. “Leasing, like discounts and other incentives, has traditionally been designed to get buyers into new cars. Without the need to compete on price, the need for low rental rates has disappeared.”

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Cost of renting a car | Cars.com illustration by Paul Dolan

Residual values ​​remain posted

The lease payment of a car is largely determined by its residual value, the projected wholesale amount of the car will be worth it at the end of the lease.

In theory, the currently inflated prices for used cars should also increase the residual value of a leased car, leading to a lower monthly rate. But that does not happen in practice, according to AutoForecast Solutions. “Rising prices for pre-owned cars should cause the residual prices used in lease rates to go up,” Fiorani said. “However, the lack of competition eliminates the need to fully appreciate higher leftovers, and it remains potential for all higher prices to pass.”

In other words, leasing companies are not under much competitive pressure to take advantage of higher resale values ​​to reduce your monthly lease payment – and those projected values ​​may at least evaporate by the time you trade in the lease.

Sign less leases, drive less miles

The percentage of consumers who lease their cars has dropped due to the inventory shortage. In December 2021, only 20% of new car shoppers leased a car, compared to December 2019, when 30% chose to lease, according to Jominy.

What’s more, even those who to do lease plan to drive less due to homework policy installed during the pandemic.

“Leasing also takes place because so many consumers now work from home that a car to travel to the office is no longer required,” Jominy said. “Those who lease also lower their annual mileage distribution. The 12,000-mile-per-year lease, the gold standard of leasing for decades, has given way to the 10,000-mile-per-year.

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Cars in driveway | Cars.com photo by Christian Lantry

A lease with lower mileage can provide monthly savings through a higher residual value, but exceeding the mileage limit can have costly consequences at the end of the lease. A lease comparison from the Federal Reserve shows how too many miles can cause enough compensation costs to cancel out the monthly savings from not opting for higher mileage limits in the first place. Before signing a lease, consumers need to factor in how their driving habits may change. Is there a chance, for example, that you will start commuting to the office next year instead of working remotely?

More from Cars.com:

What if my current lease is up soon?

According to JD Power’s 2021 US End of Lease Satisfaction Study, recurring leases start considering a new car as early as 12 months before their current lease is up. Whether the deadline for returning the car is fast approaching or even months away, shoppers need to make a game plan. Current leases have a few options: Buy out the lease, bring the car back to the lease company or – if contractually permitted – sell it or exchange it.

“Returning tenants find that the best deal on the market is to buy their existing leases at a residual value set three years ago,” Jominy said. “Some consumers may use this equity for another car, to sell to an external third party or to stay out of the new market.”

Sin says he sees many consumers reporting significantly higher leasing costs on Leasehackr’s Signed tool, which crowdsources information about recently signed lease deals.

“We see a lot of people reporting huge percentage increases in monthly payments,” Sin said. “One way they can compensate for this is with the equity they have in the car. That’s a good strategy for people looking for a replacement car: do not return your lease, [but] trying to capitalize on its increased value. Get that money and keep it in your bank account or apply it on a new lease to reduce your monthly payment.

Another option is to get a lease purchase from a third party, which can make it easier to capitalize on higher car values.

“People have a residual value of $ 15,000 on their rented car, but they find that the car is worth $ 25,000,” Sin said. “Instead of just returning the car, they can apply this ironically appreciate asset. In the past, this was pretty easy to do – you could sell it to CarMax or Carvana, but prisoners’ companies have tackled it. We work with a nationwide network of dealers that allow people to draw on lease equity.

Indeed, the editorial staff of Cars.com has experience in this first hand. Copy editor Corinne Hanshaw recently purchased her previously rented 2018 Honda CR-V. Although they considered a new 2022 model, the lease purchase proved the better option due to the lack of inventory.

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2019 Honda CR-V | Cars.com images by Christian Lantry

“When my car lease came to an end, I knew I had three choices – lease a new car, go away or buy my current lease,” Hanshaw said. “Because of my positive experience with my current CR-V, I knew I wanted to stay with that model. I went to the dealer to discuss these options, and I was informed that it would take months before I could get a new one. between renting and buying.Between the long wait and the minimal changes to the car in recent model years, I chose to buy my SUV.By buying out my lease, I saved money on my monthly payment.

How To Lease A Car During Inventory Shortage

Despite the challenges, leasing may still be the best option for some customers, but it is more important than ever to plan ahead for a purchase or lease of cars.

“All the conventional advice for buying cars is still true: shop, get quotes, do not go to the dealer until you are ready, and try to calculate what your target price is based on research,” Sin said.

That preparation involves comparing the money factor on a lease with the interest rate on a traditional car loan. If the interest rate is significantly lower, financing the car may be the better option. It is also important to compare incentives on both options, such as the total cost of the lease or loan.

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Calculate car costs |

“If it costs $ 20,000 over the course of three years to lease a car that you can buy for $ 25,000 – maybe it’s not such a good idea to lease,” Sin said. “Definitely consider both options.”

Finally, shoppers should take advantage of the increased trade-in value of their current car. JD Power said January’s trade-in values ​​are up 88% year-on-year: The average trade-in power for January is estimated at $ 9,852, up from $ 4,611 from January 2021. To get the most money when trading or selling a car, It pays to shop and negotiate the best deal because dealers are in desperate need of certain models.

The Cars.com editorial department is your source for car news and reviews. In accordance with Cars.com’s long-standing ethics policy, editors and reviewers do not accept gifts or free travel from car manufacturers. The editorial department is independent of Cars.com’s advertising, sales and sponsored content departments.


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