Grasso: The Car Lease Bubble: A Huge Problem For Auto Manufacturers

by David Grasso

Leasing has become all the rage, and it’s quickly creating a car-lease bubble that’s quickly becoming a huge problem in auto finance.

In recent years, leasing has helped drive auto sales to new record highs. Millennials comprise the “largest demographic for vehicle leasing.”

Borrow it for a while, then give it back

Leasing is pretty straightforward: instead of buying a car, you pay to use it for a given period and return it to the dealer when you’re done. Leases come with mileage limits and penalize consumers for excessive wear and tear. For millions, leasing is a no-brainer, as you can often drive a luxury car such as a Lexus for the same price as a regular car such as a Toyota.

Of course, after you’ve returned the car, you start at zero again with no equity or a trade-in that you would have had if you had purchased the car. On the brighter side, leasing allows people to always drive around in new cars and change them out every four years or less. That means your car is likely under warranty, and mechanical problems are covered by the manufacturer.

Numbers-wise, leasing prices are are all dependent on residual values, or the value of the car once the lease is over. Once that sweet ride that your neighbor likes to cruise around in is turned in, auto companies have to sell that auto on the used-car market. This is where automakers are beginning to hit a major snag.

Used-car market beginning to cool

As a member of a large extended family who leases all of our cars, I started noticing after the Great Recession that lease prices were coming down significantly.

This was strange because car prices continued to rise, so there was obviously a part of the lease formula that was being manipulated by auto lenders. Of course, lease prices were lower because of  low interest rates, but that was only part of the…

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