If you’re looking to lease a new car then you might be wondering whether prices are going to go down this year. Unsurprisingly, there’s no clear cut answer to whether the cost of leasing will go down in 2024. But our experts have broken down what impacts the cost of leasing and the changes they expect to see this year to give you an insight into lease pricing.
What Affects the Price of a Lease Car?
There are a number of different things that are considered in order to determine the cost of a lease. These include:
- On the road (OTR) value
- Residual value
- Interest rates
- Vehicle tax
- Available discounts
The list price of the car will be the cost to purchase the car and is the equivalent of the RRP you’d see in a shop. It will be decided by the manufacturer and they will generally base this on the cost of producing, transporting and marketing the car as well as their profit margin.
The OTR value is the price that the finance companies pays for the vehicle, and it includes more than just the list price. It also includes the delivery charges, registration fee, first year’s road tax and number plates. In the past few years the costs of both producing and transporting cars has risen and this has seen a rise in the OTR.
The list price doesn’t often change but the OTR may change as manufacturers can offer discounts on this figure. These discounts might be based on stock, consumer demand and the price of the other associated costs.
The residual value of a vehicle is the expected sale price of it at the end of the lease agreement. A lease is unique in that during the agreement you are not paying for the value of the car but rather the value of its depreciation. This means that the amount the funder expects to get from the sale of the car at the end of the agreement will affect how much you pay to lease the car.
Again, the residual value of a car is affected by a number of different things, and funders have complicated calculations they do to take a lot of these into account. Something for you to be aware of though is that there are a couple of decisions you make that are included here, such as your annual mileage and whether you include a maintenance package as part of the agreement.
You’ll pay interest on any money you borrow from your overdraft to your mortgage, and that includes financing a lease. When you lease a car, you are taking out a finance product, and like all finance products you will pay interest. The interest rate is calculated on the vehicle based on the Bank of England’s base rate and as interest rates have climbed in the last year we’ve seen this have a knock on increase in lease rentals.
We touched on road tax earlier when discussing the OTR, but it’s worth us mentioning it a bit more in depth as the cost of road tax is included in your lease agreement for its duration. This means the expected tax price for the entire lease is included in the funder’s calculation on how much the lease will cost.
However, something to be mindful of is that most funders will only cover the amount that the car was initially taxed at. This means that if there is an increase in tax from the first year, which happens for most petrol and diesel cars, that you will pay the difference. There’s nothing for you to worry about doing but it’s important to be aware that you may receive a small additional charge for this difference.
The final point we mentioned in what affects the cost of your new lease is the available discount.
As a leasing broker we can get discounts from the manufacturer, dealer and funder but in the past couple of years the available discounts have been few and far between. This is due to the low supply and high demand created during the pandemic and exacerbated by further global events such as fires and flooding in microchip factories and the war in Ukraine.
Interest Rates in 2024
Interest rates will differ depending on the lender but for leasing it is the base rate that’s important and this is currently over 5% at a 15 year high. The base rate is expected to gradually fall over the next couple of years. However, this will be a much more gradual fall than the rise and it won’t undo the sharp incline we’ve already seen to current levels. So, whilst we expect to see a fall in interest rates the impact on leasing prices will be a slow and small decrease over time.
Used Car Prices
The used car market has seen substantial swings in the last few years, with very high highs and pretty low lows, and it continues to be unpredictable though we are seeing a narrower range of variance. We expect the market to even out in the next couple of years as supply and demand rebalance but how quickly that happens, we can’t say. It’s expected that the used car market will continue to be fairly favourable to the seller and higher resale prices mean better predicted residual values and in turn cheaper lease pricing. Though it’s important to note the calculations made by funders will be looking at the expected resale value for at the end of the lease so will involve some prediction of changes to the market.
Another area where we are seeing the used car market have a significant impact on lease prices is on electric vehicles (EVs). As the resale value of electric cars has dropped, due to the speed at which EV technology has evolved as well as some manufacturers lowering the price of new EVs (most notably Tesla). This means that we have seen a jump in the cost of leasing an EV in the last 12 months. We expect this to remain fairly steady with maybe a small downturn as the EV sector stabilises.
Return of Discounts
As we mentioned earlier discounts might be offered by manufacturers, dealers and funders and we’re starting to see some discounts return as supply begins to return to pre-pandemic levels. There are manufacturers now with some models at pre-Covid lead times and we’re seeing transportation delays easing which means there’s some more stock of vehicles.
As our director Spencer Blake has mentioned a few times this year we’re also seeing consumer confidence being knocked by any negative press, which means that demand hasn’t always been as high as expected. With a few more pockets of stock coming up because of this. manufacturers and dealers have begun to offer discounts again. We expect to see the discounts on offer increase over the next year in terms of what is being discounted and how much the discount is.
As you can probably tell from the number of different factors we’ve looked at above there’s a lot that goes into deciding the cost of a lease car which means there’s a lot that influences whether car prices will go down in 2024. We’re cautiously hopeful that we will see a drop in prices in the coming year, but we don’t think that it will be significant enough a change in the market for you to hold fire if you need a new car now. Our team is constantly looking to get the best deals for our customers and so the prices you see at Xcite Car Leasing will be some of the best on the market for you at any time.
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