Consumers rely on car financing more than ever
A record 84.5 percent of shoppers who acquired a new car last quarter used financing, either a loan or a lease. That’s the highest level since Experian Automotive, an information service company, began tracking this data in 2006. Back in 2008, before the recession, that metric was 79.7 percent.
Credit, becoming more readily available, is helping to drive this trend. With the average age of cars on the road today hovering around 11 years, pent-up demand plays a role, as does consumer interest in improved fuel economy and safety. Ultimately, the escalation in borrowing signals consumer confidence in the ability to repay.
With this increased financing, though, Experian reports long terms. Loans now average $457 with payments over 65 months, putting the average amount financed on a new car at $26,526.
The average credit score is 749—down slightly from last year. (Credit scores can range from 300 to 850.)
Subprime loans to customers with less than a 680 credit score saw an increase, rising from 25.4 percent of loans last year to 27.5 percent in 2013. Used cars averaged $17,913 financed over 61 months, with 57.3 percent being subprime loans.
Extending payments past four years, and well beyond the typical new-car bumper-to-bumper warranty, suggests people are buying more car than they can arguably afford. In some cases, they may be rolling over debt from a previous car or buying with little money down. The good news is that interest rates remain low, with BankRate.com showing a 48-month new-car loan averaging 2.47 percent interest.
Leases average $408 payments over 35 months, according to Experian. The modest difference between the lease and loan payments underscores that those opting to lease are paying for the period of a vehicle’s greatest depreciation. Also, expensive luxury cars are disproportionately leased. Leasing increased from 24.4 percent of transactions a year ago to 27.6 percent last quarter.
With today’s cars being vastly improved over those offered a decade ago, it is easy to understand the temptation to buy new. In many cases, the fuel savings alone can offset much of a monthly payment, and the low interest rates certainly help.
Before being drawn in by advertised deals, especially now at the end the 2013 model year, work through the figures to make sure an offer is the right long-term commitment for you. While a new car has unmistakable allure, remember that the brisk car sales means there are more used cars from which to choose, and the increased popularity for leasing means there will be more low-mileage, late-model cars available.
See our new-car buying advice, and check our best new car deals.
—Jeff Bartlett
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