4 Ways Leasing Has Changed During the Chip Shortage
Struggling to meet demand, automakers don’t need to incentivize leases. And they aren’t.
Car shoppers generally turn to leasing either to experience the latest and greatest on the market or to drive something that’s beyond their budget to finance in the long term. But in a world of low supply and high demand, leasing restrictions are becoming tighter and tighter. The microchip shortage has caused some automakers to modify or even eliminate lease terms on some of today’s most popular vehicles. To understand these changes, we spoke to Tyson Jominy, vice president of data and analytics at J.D. Power. He had these insights to share:
Leasing is in Decline
In 2019, leasing made up 31% of U.S. vehicle purchases, which Jominy says was typical. But then the pandemic hit. Consumers started staying home as the work-hybrid model took root, and that percentage dropped. The chip shortage and supply-chain delays caused automakers to curtail vehicle production, leading to inventory and pricing side effects that amplified this downward spiral: “Leasing has now fallen to 18% as high new-vehicle prices have forced consumers into buying out existing leases or staying away from the lease market in general,” says Jominy.
Lease Lengths are Largely Unchanged
In the past few years, car prices have risen considerably. To help consumers cope, automakers began offering extended financing terms of up to 84 months—something that was pretty much unheard of before COVID and the chip shortage. This way, a buyer’s monthly payments would remain reasonable (and the dealer could collect more interest).
Automakers haven’t seen fit to do the same with leasing, though. Even as car prices have soared, the length of a typical lease has remained relatively unchanged, averaging 37.1 months in 2022 versus 37.0 in 2019. This has made many leases unaffordable. According to Jominy, “the average lease payment is now $583 per month, up from $480 three years ago.”
Mileage Limits are Lower
While the length of a typical lease remains relatively stable, mileage allotments are down. “The 36-month lease with a 12,000-mile annual allotment was the gold standard for decades,” says Jominy, “but that has now given way to the 10,000-mile annual allotment.” Even as people resume their pre-pandemic commutes, it may be difficult to reverse this trend, as automakers have no reason to restore the higher limit. Jominy cautions lease owners to be careful about how much they drive, so that “three years from now, they aren’t caught with a nasty overage charge at lease disposal.”
The Used-Car Market Remains Hot
In the past, lessees typically had a few options at the end of their leases: They could buy the car outright, return it to a dealer of the same make, or sell it directly to a third party (e.g., Carvana or a dealership selling another make). But now that the chip shortage has caused used-car prices to shoot up, those who leased a vehicle three years ago are now in what Jominy calls a “positive equity position,” wherein the cost to buy the car is lower than the vehicle’s current value.
That said, dealerships are hurting for inventory, and they want those cars back so they can sell them. “Right now, a low-mileage lightly used vehicle is an extremely valuable asset,” says Jominy, “and no one wants to let anyone take that away without the right of first refusal.” So many automakers have stepped in to prevent customers from seeking third-party buyouts. If a Honda lessee wants to sell their leased car to anyone other than a Honda dealer, they’ll have to buy it outright first.