Consumers in today’s economic environment are the ultimate penny pinchers. Whether it is food, clothing or transportation, consumers are constantly on the hunt for a deal that fits within their budget and still gets them the products they need.
This is especially true in the automotive world. As vehicle prices continue to soar, more and more consumers are basing their vehicle-purchase decisions on their monthly payment rather than the total cost of the car. As such, some vehicle shoppers are turning to certain strategies, including leasing and extending loan terms, to make their vehicles more affordable.
In fact, data from the second quarter showed that the percentage of new-vehicle leases reached an all-time high. It also revealed a greater percentage of consumers agreeing to used-vehicle loans with terms in the 73- to 84-month range. At the same time, the gap between average loan amounts on new and used vehicles reached an all-time high, which translates into significant savings for buyers financing a used-vehicle purchase.
What does this mean for the automotive retail market? Well, nothing is for certain, but an increase in interest rates could leave budget-conscious consumers feeling cold about longer loan terms in the long run. And while the Federal Reserve decided against raising rates last month, there’s talk it may do so by year’s end. So let’s examine some of the trends from the second quarter to see if car buyers will continue on their current path or start running to the used-car lot to get the savings they want.
Loan Balances Surge
Overall, vehicle financing is booming. The total outstanding automotive loan balance increased 11% from a year ago to a record $932 billion in the second quarter. Compared to 2013, outstanding balances are up 24%. Additionally, a record-high 85.8% of consumers who purchased a vehicle during the quarter took out a loan or lease to do so. That’s up from 85% in 2014 and 82.6% in 2012.
Meanwhile, the average amount financed for new vehicles grew by $1,095 from a year ago to $28,524. In comparison, the amount financed for used cars rose by only $413 to $18,671. And at $9,853, the gap between new and used loan amounts represents the largest separation since Experian began publicly tracking auto finance data in 2008.
Despite escalating loan values, consumers continued to make timely payments. In the second quarter, the 30-day delinquency rate dropped to its lowest level for a second-quarter period in five years — falling from 2.37% in the year-ago quarter to 2.32%. That wasn’t the case for the 60-day delinquency rate, which increased slightly from a year ago’s 0.603% rate to 0.607%.
What’s keeping monthly payments affordable and delinquency rates in check are loan terms, which continued to stretch during the second quarter. On a year-over-year basis, the average term for new and used vehicles rose by one month to 67 and 62 months, respectively. But the longer terms didn’t stop average payments from inching up as well. During the second quarter, the average monthly payment for new vehicles rose by $16 from a year ago to $483, while the monthly payment for used vehicles rose by $6 to $361.
The rise in average monthly payment pushed car buyers to leasing, which accounted for 26.9% of all new-vehicle transactions during the second quarter — the highest level on record.
Leasing also seemed to work as a budgeting tool for consumers during the quarter, as the average lease payment dropped from $407 in the year-ago period to $394.
The average lease term for new vehicles remained consistent at 36 months, but the 37- to 47-month term category did increase 18% from a year ago. On the surface, it appears consumers are willing to also stretch lease payments. And while used-car leasing accounted for a small portion of the market at 3.3%, it has increased 12% from a year ago and 27% from two years ago.
Payment Gap Widens
With the average dollar volume of loans growing, it makes sense that average payments are growing as well. When car buyers purchase a new or used vehicle, they look at the monthly payment as a barometer of what they can afford.
However, the gap between monthly loan payments on new and used vehicles reached a second-quarter high of $122. With that significant of a gap, you may find some customers beginning to gravitate toward the used-vehicle market.
Off the Lot
The automotive finance industry is finding ways to keep the metal moving, with stretching terms and leasing providing payment relief to consumers. But will that last? As long as delinquencies stay in check, lenders are likely to keep working with retailers and customers to find creative ways to make cars affordable.
The bigger question is, will consumers continue opting for 72- or 84-month loans? If interest rates rise, that could be a tough sell, especially when savvy consumers see how much they are paying in finance charges over the life of their longer loan. That, more than anything, could push more consumers to the used-car lot.
Melinda Zabritski serves as senior director of automotive credit for Experian Automotive. E-mail her at [email protected].