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Driving the Metal

January 2016, F&I and Showroom - Feature

by Melinda Zabritski

Photo courtesy of iStock. 
Photo courtesy of iStock. 

When prices increase, consumers find ways to make the cost more palatable. When prices soared in years past, consumers passed on the bells and whistles to keep their payments affordable. That’s not the case today. In the third quarter, which saw new-vehicle registration volumes reach the highest point in nine years despite high transaction prices, it was the auto finance market that stepped in with creative ways to help buyers keep their monthly payments within reach.

Reflecting that creativity were stretching terms, falling credit scores and record leasing. Additionally, outstanding loan balances grew by $98 million from a year ago to $968 billion. That’s up more than 53% from the post-recession low set in 2010.

The good news is that while finance sources are making vehicle financing available to more consumers, borrowers are doing their part by making on-time payments. In fact, 30- and 60-day delinquencies fell from 2.7% in the year-ago period to 2.5% and 0.74% to 0.73%, respectively. Now let’s take a look at the key trends in 2015’s third quarter.

Leasing Reaches New High

Over the last several quarters, leasing has become a key solution for consumers looking to control that all-important monthly payment. In the third quarter, leasing accounted for 26.9% of all new-vehicle transactions, up from 24.7% in the year-ago period and the highest percentage since Experian began publicly tracking the data in 2006.

Consumers who took advantage of leasing were able to lower their monthly payment by an average of $84. Although the average lease payment has grown, it increased only a dollar from a year ago to $398 in the third quarter. If this trend continues, leasing will likely become a larger piece of the overall automotive financing pie.

Vehicle Pricing Continues to Grow

Consumer reliance on auto finance also reached new levels in the third quarter, with the percentage of vehicles financed increasing to an all-time high of 86.6%.As for rates, the average interest rate for new vehicles financed during the period was 4.63%.

Looking at finance amounts, the average for new vehicles increased $1,137 from a year ago to $28,936. For used, the average rose $290 from a year ago to $18,866. The gap between new and used loan amounts also grew. On average, consumers financed $10,070 less on used vehicles than on new ones.

It is also important to look at the chasm between new- and used-vehicle monthly payments, as consumers often shop based on what best fits their monthly budget. During the third quarter, the average monthly payment for a new vehicle was $482, up $12 from a year ago. As for used vehicles, the average monthly payment inched up $3 from a year ago to $361.

Terms Continue to Stretch

One of the more popular consumer options for controlling monthly payments is extending the life of the loan. In the third quarter, new- and used-vehicle loans between 61 and 72 months reached all-time highs of 44% and 41%, respectively.

Furthermore, the percentage of consumers extending their new-vehicle loan term between 73 and 84 months increased 17.1% from the year-ago period to 27.5%. Used-vehicle loans are also trending toward longer term lengths, with loan terms between 73 and 84 months increasing 12% from a year ago to an all-time high of 16.2%.

Credit Scores Dip

Credit scores often dictate a customer’s creditworthiness as well as the interest the borrower can secure. In the third quarter, the average credit score for a new-vehicle loan fell three points from a the year-ago period to 710. This was good news for dealers, as they were able to capture more potential buyers. As for used, the average score remained unchanged from the third quarter 2014 at 650.

Looking at loan volumes, the superprime category led the way with an 8.3% increase from a year ago. Subprime and nonprime followed closely behind with increases of 7.8% and 7.7%, respectively. And with the distribution of open loans by risk segment remaining relatively unchanged from a year ago, the surge in outstanding balances was the result of growth in all credit tiers.

The Bottom Line

It’s clear that high transaction prices aren’t pushing consumers to the sidelines. Instead, they are turning toward a more-than-willing auto finance market that continues to come up with creative ways to keep payments affordable and the metal moving.

The growth in leasing, longer loan terms and the drop in credit scores are definitely opening up the market to buyers who might not otherwise have been able to afford a vehicle purchase. While these trends are great for moving vehicles off dealer lots, it is critical industry professionals keep an eye on the trends and shifts in the market to ensure that the automotive finance industry remains strong and healthy.

Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. E-mail her at

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