The stock market is booming. U.S. personal spending climbed 0.6 recent in April, the biggest gain in five months. But according to Experian’s State of the Automotive Finance Market Report, buying a new car is an impossible dream for the majority of Americans.
The population of the United States is being split into two distinct groups — those who have the personal income to afford to purchase a new vehicle and those who don’t. Those who can afford to buy a new car, however, are not shying away from more expensive models and optional equipment.
New-car loan amount hits record level
Experian found the average new vehicle loan amount hit a record $31,455 in the first quarter. The monthly payment for a new vehicle climbed to $523, also a record. The statistic that might be most interesting is the average interest rate for a new vehicle was 5.17 percent during the quarter. That represents an increase of 31 basis points versus a year ago.
The combination of the rise in new-vehicle transaction prices and in interest rates is driving car-buyers into increasingly lengthy car loans. The Experian report said the average car loan length for new vehicles went up during the quarter to a little more than 69 months. The most common loan term is still 72-months — six years. Almost 24 percent of auto loans are currently 72 months long, compared to just over 10 percent in 2008. Some new loans are now 85 or even 96 months in length.
Affordability changes what people buy, how they buy
“What happens in auto finance affects the whole consumer credit industry. The real issue is affordability because that changes what people buy and how they buy,” Melinda Zabritski, Experian, senior director of automotive financial solutions, said at a recent event hosted by the American Financial Services Association and the National Association of Consumer Credit Administrators.
“The average American can’t afford a new car,” Zabritski said.
Backing up her point of view is the fact the average per capita income in the United States is $31,000, which happens to be the same amount as the average new car loan.
Higher loan amounts and rising rates are making even the extra-long loans difficult to obtain for many consumers. That’s led to a downward trend in new-vehicle sales recently, a trend industry analysts expect to continue.
“The dream of owning a new vehicle is becoming more elusive to the average American,” Zabritski said. “To reverse the trend, dealers and lenders need to better understand the data and explore different options to make new vehicle ownership accessible and appealing. Traditionally, lenders’ risk tolerance has swung back and forth like a pendulum, and right now we’re seeing a more risk-averse side. But if payments continue to improve, we could see credit standards loosen.”
Consumers with poor credit will find getting a loan difficult
In a lending environment that seeks to avoid risk, those who have poor credit histories and low credit scores find it more difficult to obtain a car loan. Experian noted the people who appear to be impacted the most by the trend atmosphere are from the subprime (501-600 credit score) and deep subprime (300-500 credit score) consumers. New vehicle loans to subprime and deep subprime consumers decreased 8.4 percent and 14.1 percent, respectively, in the first quarter compared with the same period in 2017. While this might seem unfair, especially in a rising economy, it could also serve to keep risky borrowers from taking on debt they can’t pay back, a bigger problem than being unable to purchase a new car.
The other side of the coin are those Americans who can afford to buy new cars. New vehicle loans to prime (661-780 credit score) and super prime (781-850 credit score) consumers reached 73.4 percent, the highest first-quarter level since 2012.
Matt Tatham, manager of content insights and data analyst at Experian Consumer Services, a division of Experian, contributed to this article.