People are taking out bigger loans for their vehicles, and that means bigger payments: Both have reached record highs.
Despite the fact that automakers are selling fewer vehicles, they continue to make more money per sale because buyers are borrowing more and, as a result, paying more each month for those new vehicles.
The average amount borrowed to buy a new vehicle hit a record $32,187 during the first quarter, according to Experian, which tracks millions of auto loans each month. The trend has spilled over to used vehicles where the average loan also hit a record, $20,137.
“We have not seen a slowdown in loan demand. In fact, volume for new and used loans is up from previous years,” said Melinda Zabritski, senior director of automotive financial solutions for Experian.
As mentioned, the automakers have seen their average transaction price rise each month for all of 2019. Auto companies are pulling in 3.4% more on average for each sale this year, or $1,134. Incentives as a percentage of average transaction price are expected to be 9.8%, down 12.7% from a year ago, according to True Car ALG.
(U.S. new vehicle sales tick upward in May. Click Here for the story.)
If buyers are borrowing more, that translates to their payments, which have hit new highs: $554 for new vehicles and to $391 for used vehicles, according to Experian.
There has been a shift in buyer profiles, however, as people with the best credit scores are increasingly buying a used model instead of a new vehicle. Experian says 61.8% of those with a prime credit rating and 44.7% of those with a super prime credit rating took out loans to buy a used vehicle in the first quarter. Those are the highest percentages Experian has ever recorded for prime and super prime used vehicle borrowing.
Zabritski said the shift is an offshoot of a recent trend of buyers looking for ways to cut their monthly payment. It used to be that buyers would opt for a longer term to lower their payment and still get the car, truck or utility vehicle they wanted. They are also using another tried-and-true method for cutting payments.
(Click Here to see more about J.D. Power and LMC Automotive analysts predicting May sales.)
“Consumers seem to be taking advantage of options to reduce payments — specifically leasing,” she said.
Finance companies seem to be loosening the purse strings a bit when it comes to the type of buyer they’re now willing to finance. Subprime auto loan originations have a corresponding total balance of $7.07 billion, a 5.3% increase year-over-year.
The average subprime loan amount was $18,934. This is a 5% increase compared to January 2018. “While subprime origination activity and balances remain steady and in check, the data is showing an increase entering the year,” said Jennifer Reid, Equifax’s vice president of Automotive Marketing and Strategy.
(Honda sees opportunity to grow car sales in a light truck sales. Click Here for the story.)
“Prices on new cars and trucks continue to rise, but I think we’re seeing more evidence through subprime numbers that there is continued interest and activity in used vehicles for 2019. We anticipate this will persist in the coming months.”