How the car rental market is evolving | The bank rate

Many drivers choose to rent vehicles so they can change cars more frequently and avoid serious financial commitment. But while renting is a popular option, there has been a drop in availability.

At its peak, nearly 30% of retail sales were leased vehicles between 2015 and 2019. The lease share is now closer to 20%, according to Cox Automotive. This drop should make those considering a lease think twice, as it may cost more.

Why has car leasing declined?

Leasing declined for three main reasons, all triggered in part by the pandemic and ensuing supply chain issues.

1. Leasing has become too expensive

One of the most attractive aspects of leasing is the lower monthly cost it offers compared to buying an equivalent car. Typically, leasing costs a lot less, because you only pay for the vehicle’s depreciation incurred during the term of the lease, the cost of leasing and taxes – and possibly some fees. On top of that, leasing historically has a lower upfront cost than buying.

In the second quarter of 2022, for example, leasing a Honda CR-V costs $125 less to lease than to buy, according to Experian. But as vehicle prices have risen, leasing no longer holds a cheaper monthly cost. Over the past year, drivers have paid on average the same amount for a car lease as for a new vehicle loan in 2020, according to Cox Automotive. For many, this high cost negates the primary benefit of leasing and leaves it out of the question.

Increase in the number of lease buyouts

With fewer vehicles available at dealerships and higher door prices, many are choosing to keep their leased car instead of buying a new one. This process is known as lease buyout.

By retaining vehicle ownership, consumers were able to avoid rental market competition and higher vehicle purchase prices. But as more drivers sign lease buyouts, fewer vehicles have returned to the rental ecosystem. This interference in the leasing cycle intensifies the lack of available vehicles.

Fewer rental incentives

With fewer vehicles available on the market, dealers must recoup lost money in other ways. One of these ways is to remove all the incentives that would have been there before. This is especially true when it comes to vehicle rentals. So, with higher costs and fewer incentives to sweeten the deal, leasing loses much of its luster.

Buying used can be more expensive

The evolution of the rental market will also have repercussions on the purchase of used vehicles. When more drivers keep their rental cars, this limits the second-hand market to some extent. Leased cars that are not put back into circulation for re-letting often end up on the used car market. As fewer of these vehicles re-enter the round, there will likely be fewer used cars to buy.

If, like most motorists, you don’t have the privilege of waiting to buy, think about how to buy in a high-cost environment. Going the extra step to request pre-approval or add a co-signer can save you money in the long run.

Should we rent or buy in 2023?

The choice to buy or rent depends on your personal preferences and needs. Consider the main differences between leasing or buying your next car.

Although either option comes with its own set of pros and cons. Whichever you choose, prepare to spend more over the next year. This is particularly notable for leasing, as unlike in the past, it could cost close to the monthly cost of purchasing a vehicle.