Buyers fed up with record new-car prices are turning more and more to so-called “nearly new” cars and trucks — especially 3-year-old vehicles that the first owner turns in at the end of a lease — even though buyers with good credit histories could afford a new one, analysts said.
“Off-lease inventory appears to be pulling more of those prime consumers into the used car market,” Melinda Zabritski, senior director of automotive financial solutions for Experian Automotive, said in a recent phone interview.
Certified Pre-Owned vehicles are often lease returns that are reconditioned and come with a ... [+]
More than half of the prime-risk customers who financed a car or truck in the second quarter of 2019 opted for a used vehicle, according to Experian. The credit bureau defines “prime” credit scores as 661 to 780. For those consumers, 62.5% chose to finance used in the quarter, up from 60.9% a year ago.
Even among “super-prime” consumers, in a credit-score range of 781 and above, 46% financed a used vehicle, up from 43.7% a year earlier, Experian Automotive said.
It used to be a truism in the auto retail industry that new-vehicle shoppers rarely “settled” for used, and used-car shoppers could rarely fit a new vehicle into their budget, but there’s a lot of cross-consideration going on today, analysts said.
Cox Automotive reported this month it expects record-high U.S. industry sales of certified pre-owned vehicles this year — CPO for short — of about 2.8 million, based on a 25% increase in CPO shoppers from 2016 to 2019.
Cross-consideration can cut both ways. Cox Automotive said many CPO shoppers report they would also consider a new vehicle.
Lease returns are commonly reconditioned and sold as CPO vehicles, which come with a factory-backed warranty. According to Cox Automotive, the average CPO unit sold for $27,737 this year, vs. an average new-vehicle transaction price of $37,325. That is, new was 35% more expensive than CPO.
Lease maturities — that is, when leases expire and most customers turn in their vehicles — roughly doubled from 2012 to 2016, from 1.5 million units to 3 million, according to wholesale auto auction firm Manheim, a Cox Automotive subsidiary. That reflects a rebound in new-vehicle leases after the Great Recession.
Since 2016, lease maturities increased to an estimated 4.1 million for 2019, Manheim said. Manheim expects 2020 lease maturities to remain flat in 2020 vs. 2019. The auction firm said it expects 2019 and 2020 to represent the “peak” for lease returns.
However, the new-vehicle lease rate is still at or near a record high of around 30% of new-vehicle volume. That means lease returns won’t fall sharply after 2020, so those “nearly new” relative bargains will be around for a while longer.
