To most consumers, it would come as no surprise that new vehicle prices are at an all-time high. The average paid in the U.S. now sits just over $35,600, a $4,000 increase since 2013.
Unsurprisingly, loan amounts have climbed in lockstep with prices, and Americans are now borrowing money in record amounts. The average loan tops $30,000, with an average payment of $530, and an average term of six years.
“Almost every quarter it hits a new high,” says Melinda Zabritski, Experian’s senior director of automotive financial solutions. “There’s a lot of discussion around affordability, but ultimately consumers haven’t changed what they’re buying.”
Consumers increasingly prefer more expensive vehicles like pickups, crossovers, and SUVs. Compared to their passenger car counterparts, the difference in price over the term of a loan can be shocking.
“Ten years ago, the number one segment was small economy cars,” says Zabritski. “Now it’s the CUV [compact utility vehicle].” One of the hottest market segments, the CUV accounted for nearly 40 percent of new vehicle purchases in 2018.
Even though consumers are not necessarily buying fancy CUVs, the average price is still higher than a comparable small car. According to Zabritski, the difference will add $5,000 or more to the cost of a loan. In order to manage the price hike, many buyers have turned to leasing.
Lease for less
Consumers are most often driven by the monthly payment amount rather than total purchase price. Leases average $100 per month less than a loan, and sometimes well over. This option has proven so popular in recent years that leasing now accounts for around a third of new car sales.
Leasing not only props up sales numbers, but lease returns also increase the volume of late-model used cars hitting the market. These lower cost options are also proving attractive to qualified buyers. Like leasing, payments for used cars are generally $100 per month lower than for new.
“If you went back and looked at 2008,” says Zabritski, “You might see prime consumers choosing used (cars) 45 percent of the time. Now you’ve got prime consumers buying used 55 percent of the time. That’s a pretty significant increase.”
Banks, credit unions, and manufacturer finance arms benefit from these lower payments as well as the consumer. According to Zabritski, the lower the monthly payment, the lower the risk of default. “If we can keep payments lower, you can keep the [loan] performance going,” she says.
The consumer tactics seem to be working. Q3 2017-Q3 2018 data from the State of the Automotive Finance Market report shows 30-day delinquency rates dropping from 2.39 percent to 2.23 percent, and 60-day delinquency rates declining from 0.76 percent to 0.72 percent.
While delinquency rates fall, credit scores are increasing across the board, with the average now being 717 for new and 661 for used. More consumers are being shifted to higher credit tiers and are able to quality for lower interest rates, usually translating to lower payments and more manageable loans.
Subprime loan originations—those made to borrowers with a credit score between 501 and 600—have hit their lowest overall market share in 11 years, below 20 percent of loan balances. Deep subprime loans—made for scores between between 300 and 500—are shrinking.
Sticker shock is keeping consumer new vehicle demand flat, even though 2018 was a record year for automakers due to corporate, government, and rental fleet sales. Rising prices and rising interest rates continue to bring affordability into question. “When you look at how much income you need to support that payment,” says Zabritski, “It certainly is higher than your average individual income.”
Americans seem to realize that, and are opting for financial responsibility, benefitting both themselves and the industry.
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