New car loans continue to set all kinds of records — average monthly payments are now essentially $500 — and a long-feared subprime lending bubble has yet to show signs of popping. But suddenly slumping auto sales raise plenty of questions about the overall health of the car sales market.
The car loan market expansion has been remarkable. Total outstanding loans have jumped from $840 billion in 2014 to just over $1 trillion last quarter, according to Experian's latest State of the Automotive Finance Market report. The average monthly payments on new car loans is now $499, up from $483 last year. And the average new car loan size is up, too — $29,880, up $1,356 from last year's $28,524.
Car sales have been juiced partly by the continued embrace of buyers with less-than-perfect credit. The fastest-growing segment of buyers are deep-subprime borrowers, who have the lowest credit scores, Experian said. Deep subprime borrower loan volume grew nearly 12%, compared to about 8% among other credit segments. Late payments among subprime borrowers have grown slightly, Experian found. Still, they represent only a tiny fraction of total outstanding loans, lowering the systematic risk to the auto market, Experian said.
"Automotive lenders seem to be keeping cool heads when it comes to how much risk they are willing to take with subprime and deep-subprime customers," said Melinda Zabritski, senior director of automotive finance for Experian, in a statement. "Yes, subprime and deep-subprime loans are growing, but the entire market is growing from a volume perspective across all risk tiers. In fact, the subprime loans have actually dropped as a percentage of the total market. That, combined with only a slight uptick in delinquencies, makes clear that the sky is not falling."
The sky might be falling on the auto sales market, however. Record auto sales and the strength of the new car market have been a big success story in the otherwise lackluster economic recovery.
But August turned out to be a bummer of a month for auto makers, with sales falling 4.2%. Lower sales hit all major manufacturers; many started waving the white flag in stories on the bad news, conceding that the years of record-setting sales may be over.
"We had a period of several years coming out of the financial crisis when growth in auto sales outpaced broader economic growth, and that period is over," Bryan Bezold, Ford's senior U.S. economist, told Bloomberg News. "We're no longer in a period where we have a lot of pent-up demand."
Used Cars Are Popular
Sluggish new car sales don't necessarily indicate any additional risk of an auto loan bubble that might burst. It will be tempting for auto lenders to move even deeper into the subprime market to keep up transaction volume, however — particularly as buyers abandon the new car market for other alternatives.
Drivers are clearly returning to the used car market in response to high prices and other factors. The average used vehicle loan reached an all-time high of $19,101 in Q2 2016, up from $18,671 in Q2 2016, Experian said. The average used car loan payment was $364 a month.
In a bit of a surprise, customers with good credit scores are now hustling to the used car market. According to Experian, 43.3% of super-prime consumers selected a used vehicle, which represents a 10% increase over 2015. Among prime consumers, 59.9% chose used, a 6.6% increase over the previous year.
"One of the biggest trends we continue to see is the shift to used vehicles by customers with excellent credit," Zabritski said. "As vehicle prices continue to rise, savvy consumers are looking for ways to control costs. That appears to be pushing more customers toward used vehicles."
Overall, used vehicle loans also reached a new peak, accounting for 55.61% of all vehicle loans during Q2 2016.
Used car loan terms are also up, with the average loan term now lasting 63 months (the average new car loan is 68 months). Long-term used car loans are generally a bad idea, as drivers are often upside-down on the car loan throughout its life — meaning it has no value at trade-in. Also, used car loans have far higher interest rates — the average new rate is 4.82% versus 8.97% for used — so the costs of borrowing for five years or longer is much higher.
Drivers are looking for other ways to lower monthly payments, too, as vehicle leasing continues to surge — in both new and used car markets. New car leases jumped from 26.92% last year to 31.44% this year. Even used car leases, while still rare, are growing fast. Last year, they represented 3.26% of all leases; this year, that rose to 3.71%, Experian said.
Remember, having a good credit score can help you spend less on a vehicle since it will generally qualify you for the best interest rates. You can see where your credit currently stands by viewing two of your scores for free each month on Credit.com. And, if you're credit is looking second-rate, you may be able raise your scores by paying down high credit card balances, limiting credit inquiries and disputing errors on your credit reports.
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