The used-car market has faced unprecedented upheaval in recent years. From 2014 to 2024, prices increased by an average of 3 percent per year. The beginning of the COVID-19 crisis, followed by the supply shock, sent used-car prices soaring, rising by about 50 percent between second quarter 2020 and third quarter 2022. But since late 2022, used-car prices have dropped by 20 percent in several European countries, and there’s significant uncertainty about where prices are headed (Exhibit 1). This is particularly true for electric vehicles (EVs), whose price index fell by up to 34 percent, twice the price drop in the European market across all fuel types over this period.
These price decreases are driven by several factors. First, there is significant oversupply of vehicles, while demand has seen only marginal growth. Second, OEMs have adjusted new-car pricing—Tesla cut car prices by 10 to 13 percent in the United Kingdom in January 2023, for example—which directly affects used-car prices. Finally, customers have signaled they are no longer willing to pay a premium for battery EVs as they are for similar internal-combustion-engine (ICE) vehicles.
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On the left-hand side, a line chart shows fluctuations in the price of used cars in Europe from January 2019 to January 2024. The line shows that prices rose by 48% from the second quarter of 2020 to the third quarter of 2022 before dropping by 20% through January 2024. On the right-hand side, a bar chart shows the decline of battery electric vehicle used-car prices from January 2023 to February 2024 in five European countries. Prices declined the most in the United Kingdom (34.1%), followed by Germany (19.4%), Belgium (18.8%), Sweden (18.4%), and France (13.9%).
Source: “AUTO1 Group Price Index slightly decreased in September 2024,” AUTO1 Group, September 30, 2024.
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These fluctuations affect all stakeholders in the leasing industry. Car dealers may struggle to get rid of stock, facing longer holding times and price reductions. OEMs must adjust new-car prices to reflect changes in residual value or used-car prices (see sidebar, “The economics of auto leasing”). Individual consumers, of course, feel the effects of price changes. And with the current decreasing prices, leasing companies face the tangible risk of selling off-lease cars at a loss, especially on EV segments, potentially undercutting their overall financing margins.
In this environment, leasing companies have a real opportunity to protect, and even buoy, their profit margins. To do so, they must swiftly quantify their risk by assessing their exposure to pricing shifts and implement relevant risk mitigations—for both their current and future fleets.
Where to start: Quantify residual-value risk per fleet segment and develop potential future scenarios
Prior to deploying mitigations, leasing players will want to determine how they think the leasing market will evolve in the coming years, depending on local and global dynamics and events. They should also assess the overall risk of their portfolio to identify risk pockets, such as those related to technology, products, and concentration. Having a conviction about the possible scenarios of the leasing market will allow players to make better decisions about how their portfolio should evolve.
We see three potential future scenarios for used-car prices (Exhibit 2). To build a conviction for the future, companies can start by personalizing and contextualizing these scenarios for their fleets.
The new normal. In this baseline scenario, used-car prices are expected to continue declining before stabilizing and correcting to prepandemic levels (with some adjustment due to inflation). This is the most likely scenario because the used-car market, which has been abnormal since the start of the pandemic, is now returning to normal. Further scenarios involve larger corrections that would lead to sub-2020 prices. This is the main analysis that leasing companies should use to assess risk.
An EV crisis. This scenario builds on the new normal scenario to include a specific price drop for used EVs. A few factors could contribute to this decline. First, regulatory decisions, such as delays in ICE bans or the end of governmental subsidies for EV vehicles, could make EVs less attractive and cause prices to decrease. Second, technological breakthroughs, such as improved battery capacities or faster and more-accessible charging stations, could also make aging, used EVs obsolete or less attractive. Finally, the EV market and the supply of vehicles are likely to expand in the coming years because of the emergence of new OEMs, making EVs more accessible and cheaper.
A macroeconomic crisis. A continued high-interest environment, associated with a slow economic recovery and increasing international tension, could lead to a global macroeconomic crisis. In the context of such a crisis, consumers’ behavior will significantly affect the market. Uncertainty could cause consumers to freeze spending, leading to used-car oversupply and declining sales. In this scenario, overall purchasing power would be lower, and consumers would get very low prices for their used cars.
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A series of three line charts shows three potential scenarios for future used-car prices. Each chart has two lines, one for internal combustion engine vehicles and one for electric vehicles (EVs). The first, most likely, scenario shows EV prices leveling out near prepandemic levels by about 2026, while internal combustion engine prices remain slightly elevated and about $5,000 above EV prices. The second, next most likely, scenario shows similar trends as the first scenario but with an additional decline of 10% for used EVs starting in in 2025. The third, least likely, scenario depicts a macroeconomic crisis that sends prices plummeting from 2024 to 2026 before leveling out at 18% below prepandemic levels.
Source: McKinsey analysis on proprietary car data for the German market.
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While leasing companies typically assess the risk of their full portfolios, these scenarios indicate the importance of analyzing individual segments to pinpoint which segments or vehicle categories pose the highest risk in light of variables such as vehicle generation or engine type. This risk assessment also compares used-car prices with contractual residual values to determine whether there is sufficient buffer against further price declines.
For example, our research highlights the vulnerability of EVs to recent market corrections. Customers are currently willing to pay less for EVs compared with ICE vehicles (Exhibit 3). But until very recently, leasing companies were setting residual values assuming a premium for EVs.
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A line chart with two lines shows the average used-car prices in Germany for electric vehicles (EVs) and internal combustion engine (ICE) vehicles from January 2022 to July 2024. While ICE prices remained fairly steady, dropping by less than €1,000 over this period, EV prices declined sharply. In January 2022, EVs cost roughly €29,000 and ICE vehicles about €26,000. In spring 2023, EV prices dipped below ICE prices. By November 2024, average EV prices reached about €17,000.
Note: This exhibit reflects cars aged three years or older with 60,000 km or more and for select EV and ICE models only.
Source: McKinsey analysis of proprietary car data for the German market.
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For live fleets: Address high-risk segments
Mitigations should stem directly from the findings of scenario analyses, targeting areas of highest risk identified within the leasing portfolio. Leasing companies could take three actions to start lowering their live fleets’ risk exposure.
Professionalizing used-car leasing and pushing contract extensions. In the riskiest segments, leasing players could consider offering used-car leasing and contract extensions. This approach allows players to capitalize on larger in-life profits while reducing the final residual value and the associated risk exposure (Exhibit 4). Depending on the specifications, an extended contract could reduce the vehicle residual-value exposure by 8 to 12 percent.
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Two line charts illustrate the effect of used-car leasing and contract extensions on the residual value of an electric vehicle (EV) driven 10,000 km per year. The first depicts an EV whose used price drops from about €35,000 to about €17,000 over the course of five years. Adding a one-year extension to a four-year contract reduces the final residual value and associated risk exposure by 8%. Adding a three-year leasing extension to a two-year contract reduces the final residual value and associated risk exposure by 15%. The second chart depicts an EV whose used price drops from about €65,000 to about €16,000 over the course of five years. In this case, adding a one-year extension to a four-year contract reduces the final residual value and associated risk exposure by 12%. Adding a three-year leasing extension to a two-year contract reduces the final residual value and associate risk exposure by 40%.
Source: McKinsey analysis of proprietary car data for the German market, based on August 2024 data.
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Developing an optimized remarketing strategy. Leasing companies that have not already done so could diversify used-car sales channels—by exploring online auctions, direct sales platforms, and dealership partnerships—to maximize returns on off-lease vehicles. Proactive asset steering also empowers leasing companies to strategically recall vehicles ahead of schedule, anticipating further price drops in the market. This optimized remarketing can reduce the residual-value exposure loss by 5 to 15 percent.
Transferring the risk. Leasing companies could also potentially reduce risk for high-risk vehicles by offloading some residual-value exposure to investors via a special-purpose vehicle, albeit at a significant cost and hindrance to any uplift. Up to 100 percent of the residual-value exposure can be transferred. Leasing companies should establish guarantees that cover a portion of the residual-value loss.
For new business: Anticipate market trends and reinvent the end-of-contract process
In the longer term, leasing players could consider several additional actions to mitigate residual-value risk for new business written.
Harnessing AI for dynamic residual-value estimates. By incorporating sophisticated data models and predictive algorithms, leasing players could forecast residual values with greater accuracy, reducing the risk of setting overly optimistic residual values. These automated models allow leasing players to also refresh residual values monthly, rather than quarterly or semiannually. Residual-value estimates are up to 5 percent more accurate in turbulent times when updated monthly (Exhibit 5). Indeed, the use of AI for residual-value predictions could save about 5 percent of residual-value exposure.
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A line chart with a single line shows the average B2B price of electric vehicles in the used-car market from January 2022 to January 2025. It depicts an 11% jump in price in the first six months of 2023. Using AI to refresh residual value predictions every month would help leasing players have more accurate predictions in such times of steady change.
Source: B2B price evolution of electric vehicles on the used-car market.
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Diversifying the leasing portfolio. By spreading exposure across different vehicle types, brands, and market segments, leasing companies could mitigate concentration risk and minimize the impact of declining prices in any single market segment. On average, diversification does not mitigate residual-value exposure at risk but reduces the likelihood of facing significant loss on a segment from the portfolio.
Negotiating buyback agreements. Leasing companies could transfer risk to external parties such as dealers or OEMs through buyback agreements. Leasing companies would need to align early with manufacturers on a price at which the manufacturers could buy back the car at the end of a contract. New entrants, such as Chinese OEMs, may be especially receptive because of their desire to rapidly capture market shares. In this way, 100 percent of the residual-value exposure could be transferred.
In the face of challenging market conditions, leasing players have an opportunity to adapt and innovate to create new businesses, capabilities, and products. Exploring innovative solutions such as dynamic pricing, which can lead to better alignment with market dynamics, or loyalty programs that encourage repeat business and generate consistent profits could not only protect and unlock profits but also help these companies proactively address future uncertainties in the European leasing market.
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