Auto Leasing on Track to Compete With Desire to Buy
There are more signs that consumers are back at the dealerships where they’re not only buying new vehicles but signing leases as well.
With sales of domestically produced vehicles totaling 11.96 million units in May, last month performance was the best May on record in more than five years, according to Brian Turner, chief strategist for Catalyst Strategic Solutions, an investment subsidiary of Catalyst Corporate Federal Credit Union in Plano, Texas.
While May’s total sales were up 100,000 units from April, Turner said the figure is 200,000 less than the annualized pace for all of 2012. Still, credit unions have noticed the uptick in financing.
“The industry certainly benefited from improved consumer spending during the last quarter,” Turner said. “Gains in auto sales helped to contribute to a 1.4% annualized increase in loans. It also helped to advance the industry’s consumer loan market share closer to 9%.”
Indeed, an improvement in auto loans over the past three to four months is a result of lenders easing on selected terms while terms on credit cards and other consumer loans were unchanged, said Turner citing a recent Federal Reserve report on bank lending practices. This includes extending maximum maturity and reduced spreads on auto loans, he added.
“This may be the case with credit union auto loans as well. The average 60-month vehicle loan declined by 20 basis points over the first five months in 2013 while the three-year U.S. Treasury rate increased 13 basis points,” Turner explained. “This infers that credit unions reduced their nominal asset spreads by about 33 basis points.”
Data from the NCUA for the first three months of 2013 showed that vehicle loans increased at a 6.6% annualized pace, Turner noted. Used vehicle loans rose by 5.8% while new vehicle loans increased 8.1%, setting a strong pace for the first part of 2013 but is most likely unsustainable for the rest of the year, he offered.
Meanwhile, there’s even more proof that credit unions are at the entry point of a trend that shows more consumers are buying new cars and leasing cars. Experian Automotive recently announced that new vehicle leasing rose by 12.5% to achieve the highest level since it began tracking the data in 2006.
According to Experian’s State of the Automotive Finance Market report, leasing accounted for a record 27.5% of all new vehicles financed, up from 24.4% in the first quarter of 2012.
Additionally, findings from the report showed that the average monthly payment for a new vehicle financed in the first quarter was $459, down from $462 in the first quarter of 2012.
“Consumers tend to shop for vehicles based within the limits of their budget, and leasing is often seen as a viable path to a lower monthly payment,” said Melinda Zabritski, senior director of Experian Automotive Credit. “Lenders have seen overall stability come back to the market since the recession, and leasing has gradually returned as a larger part of many lender strategies.” While leasing a vehicle can potentially help consumers achieve a lower monthly payment, Experian’s data showed a rise in loan term lengths from 65 months in the first quarter, up from 64 months in the first quarter of 2012 and a decrease in interest rates from 4.5%, which was down from 4.6% for the same period.
The shifts have helped to keep payments low for new vehicles financed, according to Experian. In the first quarter, the average loan amount for a new vehicle financed increased by $628, going from $26,020 in the first quarter of 2012 to $26,648 in this year’s first quarter. The average used vehicle loan increased $461, going from $17,071 to $17,532 for the same period.
An interesting wrinkle that has emerged within the bustle of new car financing is the rise of subprime loans. Experian found that consumers within all credit score tiers were able to obtain financing in the first quarter. Most notably, loans going to consumers with credit outside of prime such as nonprime, subprime and deep subprime, jumped to 45.2% of the overall loan market in the first quarter, up from 44.4% for the same period in 2012.
The average credit score for a new vehicle loan dropped to 755 in the first quarter, which was down from 760 from the first quarter of 2012, according to Experian. When it came to how lenders fared in market share in the first quarter, Experian said at 16.7%, credit unions were ahead of finance companies and buy here/pay here financing at 15.5% and 10.7%, respectively. Banks led the pack at 39.5% followed by captive finance companies at 17.43%.