Average new car loan hits record high of $40,290 in second quarter
The automotive industry regularly encounters market reports filled with optimistic projections and catastrophic predictions, with the latter attracting more attention these days. But the key to understanding tomorrow begins by looking at recent history.
Such is the case with the release by Experian of its Q2 2022 Automotive Finance Market Status report. The comprehensive document explores recent happenings with auto loans, now with more than $1.3 trillion in outstanding balances.
Continued Growth of Used Cars
Perhaps the most significant finding of the Experian report is that more consumers are choosing used vehicles over new ones. More than 61% of all auto financings in the second quarter were for used cars, up 3% from the same period last year. These numbers bring to life the lingering problems with new car inventories.
Buyers of all credit levels participated in the shift to occasion, with the largest event occurring for consumers close to prime (77.69% in Q2 2022 vs. 72.3% in Q2 2021). Similarly, 89.29% of subprime car buyers in Q2 2022 purchased a used vehicle; this compared to 86.28% during the same period last year.
“Between inventory shortages and rising vehicle costs, consumers are looking to make the most profitable decision, which is often a used vehicle,” noted Melinda Zabritski, senior director of automotive financial solutions for Experian.
Affordability plays a role in buying a car
While a car buyer’s ability to pay for a new ride has always been a factor in the buying process, such an element is even more relevant today. Rising used car retail sales and reduced flexibility with new vehicle pricing have led to changes in lending fundamentals.
In the second quarter of 2020, the average new car loan was $36,117, but is rapidly advancing to the last quarter, which jumped to $40,290, an increase of 11.5%. There was also a rise in interest rates for a new car loan during the same period. Two years ago, the average consumer took out a loan with a cost of borrowing of 3.95%. This figure rose to 4.33% in the last quarter.
So it’s no surprise that the typical monthly payment has jumped. Experian reports that the average lease payment for the second quarter of 2022 is $540, up from $459 two years earlier. However, this $81 gap is not as large as what happens with loans. New auto loan borrowers last quarter are paying an average of $667 per month compared to $570 for a similar loan two years ago; that’s a difference of $97.
To put that amount into real perspective, the added cost of a car loan is more than half of what the typical household spends on utilities, according to energystar.gov. Not surprisingly, loan terms are getting longer for borrowers at near-premium and higher risk levels. The average borrower in the second quarter of 2022 has a loan approaching 75 months.
Loans to credit unions are gaining ground
Another revelation in the data is the rise of credit unions as a funding source, with these Q2 2022 loans at their highest level in five years. 25.81% of loans in this period were from a credit union, compared to 21.13% in Q2 2017.
This increase came at the expense of banks and captives, which saw a decline in loan origination. For example, second quarter lending through captives plunged from 28.47% in 2021 to 22.64% this year.
Selling in a dynamic market
Surviving, and we would say thriving, in today’s automotive market means recognizing the ever-changing world of the consumer. Experian’s report calls out particular areas of interest for franchise dealers.
- Used vehicles: Increased demand for used vehicles means savvy dealerships need to maintain an attractive inventory despite acquisition challenges.
- Affordability: Consumers are responding to rising vehicle prices and interest rates by paying more each month and extending loan terms. In particular, this last quarter saw growth in loans with tenors of 73 to 84 months. Thus, F&I staff should not hesitate to discuss affordability options with buyers.
- Loan funding: Increased credit union lending may affect bottom line, especially if funding comes from non-partner institutions. Dealers need to follow what borrowers are considering, especially if a captive is not competitive.
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