Prospective buyers finding it easier to acquire an auto loanDate posted: 9/19/14 10:45:00 AM
It's getting easier to land a car loan, according to Melinda Zabritski, senior director of automotive finance for global information firm Experian.
"More and more consumers, especially those that are credit challenged, are turning to the used vehicle market as a viable option to purchase their next car," Zabritski said.
Citing data from Zabritski's company, Reuters reported 85 percent of new car purchases and 53.8 percent of used car purchases were financed by a lender in the second quarter of 2014. Both new and used car loans were up compared to the second quarter last year when 84.5 percent of new car purchases and 52.9 percent of used car purchases were backed by a loan.
As auto sales have soared throughout summer, it's not all that surprising to see more consumers able to land an auto loan. But there are a few surprising statistics: Both monthly payments and the size of auto loan amounts have risen to all-time highs.
The average monthly payment for a used vehicle increased 1.1 percent to $355, with the average vehicle loan rising 1.9 percent to $18,258.
Auto loans by the numbers
The percentage of leases is also up, reaching 26 percent in the second quarter, which is an eight percent increase from 2008, according to LMC Automotive. This could lower used car prices in a few years - and in turn, hurt new car sales - when all of those three-year leases expire.
Additionally, 32 percent of auto loans are 72 months or longer, which is generally looked down upon in the industry. That figure is up from 23 percent in 2008, according to LMC Automotive. Greg McBride, chief financial officer at Bankrate.com, told the Philadelphia Inquirer that dealers can offer longer loans on pricey cars, making payments seem reasonable to buyers. But those loans tend to be front loaded with interest, making it a longer process for buyers to pay off principal and build equity for a trade-in.
McBride said another reason that lenders are willing to make longer and larger loans is due to the fact that vehicles are now more easily repossessed.
"You miss more than one payment and it won't be in the driveway in the morning," McBride said.
What to know about long-term loans and cars
While a 30-year mortgage can help a first-time buyer land a home, car buyers are often discouraged from taking out a long-term loan for a new or used vehicle because - unlike homes - cars lose their value very quickly.
But with massive amounts of pressure on car manufacturers to sustain their current level of sales, a growing number of companies are using suspect tactics to stay ahead of the curve.
John Mendel, sales chief at Honda Motor Co. U.S., recently chastised some competitors for using "short-term" strategies such as increasing sales to rental car companies to enlarge sales totals and using 72-month loan terms.
Adam Jonas, an analyst at Morgan Stanley, told the Inquirer the current car trends could lead auto manufacturers down a slippery slope.
"It could be a disaster later on," Jonas said. "We're clearly robbing Peter to pay Paul."
Jonas believes car sales will continue to soar through 2017, reaching an annual sales rate of 18 million, though that could be the tipping point. He projected car sales will fall to 14 million the year after, meaning factories could close and thousands of people could lose jobs as car manufacturers try to sustain profit levels.
"It just seems like 2007 all over again," Earl Stewart, a Toyota dealer in Florida, told the Inquirer. "The credit ease with which people are financed is as liberal and loose as it ever was."
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