Sub-Prime Auto Financing, Loan Terms On The Rise
Long-term auto loans, leasing and sub-prime financing all saw increases year-over-year from 2011 to 2012, according to a report by Experian, a consumer credit rating agency. While typically a dry and detail-oriented subject, the area of auto financing gives us some insight into the nature of the new car market and even the economy itself.
The average term for a new vehicle loan rose to 65 months in Q4 2012, up from 62 months in Q4 2011. Longer terms and lower interest rates allow for smaller monthly payments for consumers, enabling them to pick a more expensively vehicle than they may have been able to afford with a shorter loan.
The lower interest rates and monthly payments meant that the average loan amount increased slightly, up $272 to $29,691. While used car loan terms stayed flat at 60 months, interest rates did decline slightly (from 8.67 percent to 8.48 percent) as did the average monthly payment. Sub-prime financing accounted for just under a quarter of all new vehicle loans in Q4 2012, up from 22.59 percent in Q4 2011. 55.4 percent of used car loans were sub-prime, up from 53.8 in Q4 2011.
The report comes on the heels of another study claiming that most middle-class Americans have trouble affording a new car – a notion that is at odds with the 15 million + SAAR expected this year, along with strong 2012 sales. The longer loans and increase in sub-prime financing give us a clue as to the way things are going. By approving more people for loans and making their monthly payments more manageable consumers are able to afford a car more easily, while the finance company can collect interest for a longer period of time. TTAC commenters with experiencing in this area, feel free to chime in with your take. Steve Lang has already sounded the alarm in recent columns with respect to the used car market. But I am wondering what the implications are for new car sales, and how the SAAR is being affected by overzealous auto financing.
More by Derek Kreindler
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Something else to note, which goes contrary to internet consensus, is cars are simply better built today than they were even 10-20 years ago, warranting higher used car prices. In 2003 I bought a 1993 Honda Accord EX with 91,000 miles for $2200. That's $2700 today. When I bought it, it was solid, but it looked and felt like something out of the 80s. Fast forward to now, a 2003 Accord costs about $5000-9000, but it looks and feels modern. I would feel confident buying one today and driving it through 2023. I think we will be seeing the cars of the last decade on the road for at least another 10 years. The used car market recognizes this and values used cars appropriately.
A fine column filled with common sense and a few dashes of pessimism. Am I the only one who saw a car on a lot and said " Must have that"?