Is Leasing the Answer to the Sharp Rise in Vehicle Prices?
Authored by Jacob Koester
In a normal year you could expect your new vehicle to lose roughly 10% of it’s value the moment you drive it off the lot, and 20-25% in the first year. So why in 2021 are we seeing used autos selling for close to, and in some cases even more than their original buying price?
We will break down the main reasons new and used vehicle prices are so high, and why renting/leasing part of your fleet might make more sense than ever right now.
Semiconductor Chip Shortage Halts Production of New Vehicles
In 2020 we experienced a global shortage in computer chips that that has carried over into 2021. These chips are crucial in the production of new vehicles, and as a result of the shortage, auto manufacturers have been forced to cut way back on production. Since last year the nation’s new-vehicle inventory has plummeted a staggering 48%.
This has not only made it almost impossible for consumers to find new vehicles, but prices have shot through the roof as well.
Hopes of the chip shortage easing up have been dashed by a recent surge of COVID-19 cases in many asian countries where the chips are primarily manufactured. Analysts are predicting the shortage will extend well into next year, and will likely not return to normal until 2023.
Effects of COVID-19 on the Used Vehicle Market
Along with its contribution to the manufacturing shortage, the COVID-19 pandemic also led to record levels of unemployment in 2020. The financial anxiety this caused had several major effects on the used car market:
- Many individuals who would’ve sold their used vehicle and upgraded to new, were now just holding on to their vehicles.
- Rental agencies, who normally would replace their fleet every year with new models, were holding on to their used vehicles longer as well due to the manufacturing shortage.
- The people who were still buying, were by and large opting to purchase used over new vehicles due to both the manufacturing shortage and financial uncertainty.
- Vehicle repossessions were suspended far longer than normal, cutting even further into the supply of used vehicles on the market.
This large decrease in supply and increase in demand for used vehicles caused prices to skyrocket in mid 2020, and it has only further increased since.
How Much Have Prices Actually Increased?
The average new car right now is selling for over $40,000, which is up nearly 10% from just 2 years ago. Even with the increased price, the demand is still way out pacing the supply, and this is only expected to get worse in the near future as the microchip shortage lingers on.
Used Cars have seen an even more staggering increase. Searches for used cars are double what they were a year ago, and according to Black Book, used car prices have jumped 30 percent from what they were last June. Later model used vehicles have even been selling for several thousand dollars more than what they were purchased for.
Is Renting/Leasing the Right Solution for Your Fleet?
Buying vs Leasing has always been a hotly debated topic among fleet managers. There are benefits to each, and our short answer to this question in a normal year is to do both. Own as many vehicles as you can utilize 100% of the time, and rent or lease the rest based on short term needs for a given project.
However, with used vehicle prices higher than they have ever been, and new vehicles almost impossible to find, it doesn’t make sense, nor is it even feasible to buy a large chunk of your fleet right now. Below are the top reasons why renting/Leasing IS the right solution for your fleet right now.
We don’t know exactly how long the vehicle market will stay the way it is, but we do know it won’t last forever. There is no sense in tying up huge sums of cash into assets that will lose a large percent of their value when the market returns to normal.
When you rent or lease you can allocate your cash into assets that will instantly earn your company revenue, without having to worry about financing and depreciating the vehicles.
Renting/Leasing also gives you the benefit of only paying for the vehicles when you actually need them.
There is no sense in paying exorbitant amounts of money right now for a vehicle you might only use half the year. When you rent you have the flexibility to use a vehicle for the exact amount of time you need it for a given project. This allows your company to get as close to 100% fleet utilization as possible.
For many companies looking to add vehicles to their fleet right now, availability is an even bigger problem than price. To put it simply, you can’t buy a vehicle that a dealer or manufacturer doesn’t have. Renting/Leasing is not only the smartest option right now, in many cases it is the ONLY option.
These are the biggest reasons leasing/renting makes sense for your company in the current vehicle market. If you are interested in renting or leasing as a temporary fleet solution, you have a great partner in City Rent a Truck. We are happy to answer any questions you have and find you the right vehicle(s) for your project needs. Just give us a call at any of our 4 locations!