Some auto lease deals give consumers a way to save $200 or so on monthly car payments

The auto lease is making a comeback in 2024 as a way to for consumers to get around turbocharged auto loan rates. And the lease is increasingly popular when it comes to parking an electric vehicle in your garage.

Nearly half of all EV sales involved a lease in the second quarter of 2024, according to new data released Thursday morning from TransUnion. That's up from roughly one third for the same time a year ago. Going back two years, only 20.9% of EVs sold were leased in the second quarter of 2022.

Another bit of data: In June 2024, 68% of all new EV transactions were lease deals, compared with 22% industrywide for any powertrain type, including EVs, according to Edmunds.com.

It's a shocking uptick, until you realize that a loophole in a key tax credit that was part of the Inflation Reduction Act of 2022 clearly is giving dealers a sweet edge when it comes to promoting attractive leases for new EVs and plug-in hybrids, especially as many new vehicles are introduced.

"The application of the IRA tax credit is one of the key drivers without a doubt," Satyan Merchant, senior vice president and auto and mortgage line of business leader at TransUnion, told the Detroit Free Press.

"It's not a coincidence, that's a big driver."

Merchant stated auto leasing has been "up overall in recent quarters, but nowhere more so than in the EV market, where leasing has now surpassed financing as the preferred option among consumers.”

High car loan payments drive some shift in leasing

The lease crafts a way for consumers to see a more affordable monthly payment — perhaps $200 or so lower each month — at a time when we're dealing with high car prices on top of high auto loan rates.

The average new car loan rate for a five-year car loan that's being offered now is 7.9%, according to Bankrate.com data. The average was 7.18% a year ago and 4% on March 16, 2022, just before the Federal Reserve started hiking short-term interest rates.

The average lease payment each month was $517 for a non-luxury vehicle, according to the TransUnion study. By comparison, the average auto loan payment would be $707 a month for a similar vehicle.

In June, new car buyers who took out a car loan to finance their purchase paid an average rate of 7.3% for their car loans, according to data from Edmunds.com. The average term of the loan was nearly six years at 69.1 months. The average monthly payment was $739. The amount financed averaged $40,865.

Many times, Merchant said, car buyers are less rate-sensitive than many imagine and, actually, far more focused on monthly payments.

Lower payments on lease deals create an opportunity, he said, for dealers to work with consumers who are shopping for a lower monthly payment. Leasing in general benefits manufacturers and dealers, he said, by moving inventory, creating loyal customers who will return in two or three years after the lease ends, and consistently replenishing an inventory of gently used cars after a lease expires.

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A big difference in some lease and loan payments

The leasing story for EVs has its own twists: Notably, car buyers can find some well-positioned lease deals on a wide range of EVs, thanks to the unusual way that the clean vehicle credit works for leases. Many buyers who want to try an EV can use a two-year lease to see whether it fits into their lifestyle or whether it's the right model for them. They aren't stuck with an EV for six or seven years, as the technology evolves and new models come on the market.

The difference in monthly payments for EVs being leased and EVs being financed can be quite stark.

TransUnion provided examples in the EV universe: The Hyundai Ioniq 5 had an average lease payment on transactions in April of $439.55 a month. That amounted to $308.23 less a month than the average car loan payment of $747.79 a month for the same vehicle, based in data in the report from TransUnion and S&P Global Mobility.

The Tesla Model 3's monthly payment on a lease was an average $450.04 — or $193.05 less than the average car loan payment on the Model 3 for transactions in April. The average loan payment was $643.10 a month.

The Toyota bZ4X had an average lease payment of $429.14 a month loan payment — or $288.12 a month less than the finance payment of $717.26 a month for transactions in April, according to the data from TransUnion and S&P Global Mobility.

Automakers offered some strong incentives in July to support the deal for a lease, such as through the captive finance company, to those who were willing to lease certain models, according to Mark Schirmer, director of industry insights at Cox Automotive.

In July, Kia was offering up to $13,100 on a 2024 Kia EV6 and up to $10,300 for a lease of a EV9, Schirmer said. And he said Ford was offering $10,300 "Lease Cash" on 2023 F-150 Lightning trucks. The data, he said, is from vAuto Live Market View, a Cox Automotive platform that helps dealers manage inventory and close deals. Dealers can see those offers when working on a deal with a consumer, Schirmer said.

Going outside of EVs, some other auto lease deals — which might require a decent down payment — could be found for as low as $299 a month or less in July, according to Edmunds.com research. For example, a lease deal on a 2024 Buick Envista popped up at $239 a month for 24 months with $2,829 down in several states, including Michigan, and was running through July 31.

When it comes to leasing, consumers must research all the details, including any acquisition and lease-end disposition fees that may not be advertised but only show up in the fine print. And, yes, many deals are only available to those with top-tier credit scores. And yes, they must pay attention to how many miles they drive each year and what their cost will be if they drive more miles than allowed under the lease.

Auto leasing plummets in pandemic

Auto leasing fell in popularity for a time after the COVID-19 pandemic hit in 2020, thanks to declining inventories. In 2022, leasing fell to 18% of the market, down from 30% in 2019, according to the TransUnion report. Year-to-date, leasing is now at 25%.

The drop in leasing a few years ago will trigger some problems down the road for dealers as fewer leased cars and truck will automatically return to dealerships in late 2024 through early 2026, Merchant noted.

The faithful lease customer cannot be counted on returning soon to generate another sale or turn in a gently used car or truck that would be available for resale. Dealers, Merchant said, will need to try to attract more customers who are new to leasing to fill the gap. Maybe, the lease can work for empty nesters. Maybe, those who are working remotely and no longer have long-distance daily commutes. Maybe, those who want to try switching to an EV but would rather test the waters since they aren't quite sure how they'll adapt to the new technology and a commitment to charge the vehicle.

When it comes to EVs, lease prices lately might be an easier sell. Several factors appear to be driving a rapid growth in EV leasing, according to TransUnion, including an increase in inventory levels of electric vehicles at dealership and attractive incentives that are driving down monthly payments on leases among different EV lineups.

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EV tax credit has impact in 2024

The Inflation Reduction Act of 2022 changed the rules for the EV tax credit for vehicles purchased from 2023 to 2032.

The ease of using a tax credit for EVs and plug-in hybrids greatly improved in 2024.

Now, the buyer doesn't need to wait any more until filing their tax return to claim a valuable "clean vehicle tax credit." Beginning in 2024, buyers are able to receive an "instant rebate" after filling out tax-related paperwork at the dealership when buying an emission-free car or truck. You get immediate access to the money, which could even be used toward a down payment.

For some vehicles, you'd receive up to $3,750 in a tax credit. For others, you'd receive up to $7,500.

For vehicles placed in service April 18, 2023, and after, you'd receive up to $3,750 if the vehicle meets the critical minerals requirement only. An eligible clean vehicle can't contain any critical minerals that were sourced by a "foreign entity of concern," such as China.

Or you'd receive up to $3,750 if the vehicle meets the battery components requirement only. Or you'd receive up to $7,500 if the vehicle meets both.

Very strict eligibility requirements mean that not all EVs are covered for the credit when you buy the vehicle and not all buyers are able to claim the credit, if their income is too high.

Currently, you might qualify for a credit up to $3,750 on 2024 Nissan Leaf S with a manufacturer's suggested retail price of up to $55,000. Or you might qualify for a credit of up to $7,500 on a 2024 Chevrolet Equinox EV with an MSRP of up to $80,000.

To receive the credit, the dealer must confirm that your specific vehicle qualifies and must provide you with an IRS time-of-sale report. Not every version of a given model will qualify. See federal government's official site at www.fueleconomy.gov for details.

Individual buyers must meet certain income guidelines, which tend to be fairly high, to be able to benefit from the clean vehicle tax credit. Your modified adjusted gross income cannot exceed $300,000 for married couples filing jointly or a surviving spouse; $225,000 for heads of households; and $150,000 for all other filers.

The Internal Revenue Service notes that you can use your modified AGI from the year you take delivery of the clean vehicle or the year before, whichever is less. Make sure that your modified AGI is below the threshold in one of those two years to be able to claim the fairly lucrative credit.

One caveat: Move cautiously if it all boils down to buying a clean vehicle now and estimating your income for 2024, if you wouldn't qualify under the limit for 2023. What happens if you guess wrong and your 2024 modified adjusted gross income turns out to be higher than the limit for the tax credit? In that case, you would be required to repay the IRS.

Ah, but when it comes to leasing, a $7,500 "new clean vehicle tax credit" provides more power for consumers to lease, instead of buy, many types of electric vehicles and plug-in hybrids. Leasing is one way to get around some complex rules. And the credit has ended up triggering a variety of loophole-driven lease deals, according to Edmunds.com.

The bottom line: Leasing makes some EV models eligible for tax credits when those credits are not available to buyers on that same EV through a purchase. Granted, the tax credit belongs to the leasing company, often the automaker's captive finance arm. But some or all of that savings could be passed along to the buyer.

More electric vehicles and plug-in hybrids that are leased could qualify for the tax credit because the complicated restrictions don't apply to leases — the driver's income doesn't matter, the cost of the car or truck doesn't matter and its battery sourcing and location of final assembly don't matter.

All battery-powered models qualify for full credit of up to $7,500 if they're leased because the vehicles are treated as commercial vehicles. All the competition in the market can certainly contribute to more attractive lease deals on EVs as some savings are passed along to the buyer.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.