As the cost of new cars keeps going up – and the average transaction price is now north of $34,000 – leasing becomes a more popular option for consumers.
Experian Automotive reports the average amount financed and the average monthly payment for a new vehicle continued to climb in the last quarter of 2015, breaking the previous records. The company says the amount financed on a new car during the quarter was $29,551, up $1,170 from the fourth quarter of 2014.
“People shop for vehicles largely based on monthly price, and right now, average dollar amounts for new vehicle loans are soaring,” Melinda Zabritski, senior director of automotive credit for Experian Automotive, said in a statement. “In order to stay within their budget goals, we have seen that more consumers — even those within the prime and super-prime risk categories — are turning to leasing and used vehicles as cost-effective alternatives to buying new.”
The report shows the average lease payment was $81 dollars a month less than the purchase payment, and dealers were only too happy to lease a new car rather than sell it. Leasing reached another record high of 33.6% of all new financing during the quarter.
Warning for car companies
But one auto industry insider, Bob Lutz, a former executive at GM, Ford, and Chrysler, is warning car companies they are dangerously close to doing too many leases.
“You don't want to do too much leasing because the cars aren't really sold,” Lutz said in an interview with CNBC's Squawk Box. “Your lease rate is essentially a bet on the residual value of the vehicle after two or three years. If you get that residual guess wrong, you can stand to lose a lot of money.”
But Lutz's concern for automakers may suggest that leasing can be advantageous to consumers. It all has to do with how leases are structured.
When you lease a car, you pay only for the part of the car you will be using. After the two or three year term is up, you return the car.
Residual price is key
At the beginning of the lease, the consumer and the leasing company agree on what the car's value will be at the end of the lease. That's important, because the monthly payments are based on the purchase price minus the residual price. The higher the residual price, the lower your payments will be.
Lutz worries that car companies have overestimated those residual prices. With so many leases, that means a huge number of vehicles hit the used car market at the same time, when those lease terms are up.
“If you go over 30% leasing in any one particular model, all those cars flood the used car market at the same time, driving down prices,” Lutz said.
So if you've been leasing a vehicle, chances are you've gotten a pretty good deal, because the car you will turn in will be worth less than the car company thought. But be warned – they'll probably try to make it up on leases in the future.
How to negotiate
When negotiating a new lease, the car company will likely try to lower the residual value of the car you are leasing. To prepare, check with a source like Kelley Blue Book and price a three year old model of the car you plan to lease. That should give you a rough idea of what the residual value will be in three years.
In the meantime, consumers might want to consider purchasing a used car rather than leasing. The influx of two and three year old cars coming off leases should produce plenty of deals.
“Over leasing will certainly depress used car prices,” Lutz said. “As used car prices are sufficiently depressed, the used car market is strong.”
The Experian data shows consumers are already moving in that direction. Used vehicle loans made up 62.8% of all vehicle financing, and the gap between payments on new and used vehicles averaged $134 in the last quarter, an all-time high.