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Climbing APR pushes lease penetration to new highs

March 23, 2018
With loan interest rates at an eight-year high in February, more consumers than ever are turning to leasing as a way to lower their monthly payments, according to a report from Edmunds. 
Average new-vehicle annualized percentage rates hit 5.2 percent in February, up from 4.9 percent last year and 4.4 percent in 2013, according to the report. Used vehicles were not immune either as average APR among the category rose to 8.3 percent compared to 7.9 percent last year. 
The increase in average interest rates are largely driven by an uptick in the number of mid-range new-vehicle APRs of 4 percent to 7 percent, Edmunds reported. Meanwhile, rates above 7 percent and below 2 percent are expected to remain relatively steady. 
"We’re starting to see a trickle-down effect from the rate increases happening at the federal level," Jessica Caldwell, Edmunds’ executive director of industry analysis, said in a press release. "The Fed rate hikes directly affect unsubsidized loan rates offered by third-party lending institutions such as credit unions and banks, and as a result, we’re seeing loans that were formerly between 2 percent and 3 percent being pushed up into higher APR brackets." 
Higher interest rates and rising new-car prices contributed to record high lease penetration of 33.9 percent in February, Edmunds added. Average new-vehicle prices rose 2 percent year over year last month to $35,444, according to a report from Kelley Blue Book. 
"Car shoppers tend to have tunnel vision when it comes to their monthly payments," Caldwell said. "As average transaction prices and interest rates rise, we’re likely going to see more consumers explore the option of leasing. In some cases, this is a result of consumers simply seeking a way to cut down monthly payments, but for many others, this the only option available when they discover that they can no longer afford the costs of a new vehicle."