The auto industry is propelling the economyDate posted: 2/18/15 08:30:00 AM
It's no secret the automotive sector is helping keep the U.S. economy on track. While the housing market still tries to find its footing, many Americans are pressing the pedal to the metal when it comes to auto purchases.
"The industry had a great start to 2015 in January, and that sales momentum continues in February with exceptional growth in retail sales," John Humphrey, J.D. Power's senior vice president of global automotive practices, said in a statement.
Surprisingly, a big push in sales is coming from a rising number of consumers who are seeking leases rather than outright purchases. According to a joint forecast from J.D. Power and LMC, leasing penetration increased to a record 27.4 percent of retail sales in the first 11 days of February.
Eric Lyman, vice president of industry insights at TrueCar, said automakers should anticipate higher revenues as natural consumer demand drives sales. Automotive News cited decreasing unemployment rates and an improved stock market as a couple of reasons for the boom in leases.
Leases for vehicles are rising in popularity
The Great Recession hindered the ability of many millennials to purchase cars, but that trend appears to be changing as the economy improves. TransUnion reported millennials make up the fastest-growing demographic among all auto loan borrowers. The group of young adults accounted for 27 percent of all auto loan originations in 2014, an increase from 16 percent of total loan originations in 2009.
"The growth in millennials' auto loan originations dispels the common myth that millennials are not buying cars," Jason Laky, TransUnion's automotive business leader and senior vice president, said in a statement. "The growing average loan balances for millennials, combined with stable delinquency rates, indicate that we are still in the midst of a strong auto lending environment."
Outstanding auto loan balances surged 23 percent for millennials in the past year alone - the highest rise among any age demographic. The average opening loan balance for these car-buying young adults increased from $17,942 in 2013 to $18,678 last year, a 4.1 percent jump year over year.
"They're maturing into their adulthood," Laky told Automotive News. "They're getting to the point where they're employed, they're having families, they're moving to a place where they're financing just like previous generations."
Automotive News reported robust residual values make lease deals more appealing to consumers.
To lease or buy?
While leasing is a suitable option for many consumers, especially those without the cash to make a large down payment, buying can be a better option for many Americans.
U.S. News & World Report stated buying a vehicle is a great option for consumers who like to keep their car as long as they can. Buyers gain equity in their vehicles as they continue to make loan payments, whereas someone who leases doesn't gain any equity because he or she is basically renting the car.
And once consumers are done paying off their loans, they own their cars and don't have to include a monthly car payment in their budgets. If car buyers decide to keep their cars for five years after paying off their loans, that's 60 months of living without a car payment, which could help a consumer establish a nest egg or a down payment for a home.
Cash-strapped homeowners who are interested in purchasing a car might want to consider a home equity line of credit. This line of credit is available to qualified homeowners who put their homes up as collateral. In turn, a bank provides an open line of credit that can be used for a down payment on a car, student loan repayment or home renovations.
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