Easy Riders: Boomers Have Highest New Car Loan Potential
When it comes to buying a new car, baby boomers may have an edge over the potential buying power of the much sought-after Generation Y.
Consumers in the 55- to 64-year-old age range are most likely to buy a new car simply because this group has the second largest number of licensed drivers, according to a new study, Marketing Implications of the Changing Age Composition of Vehicle Buyers in the U.S., from the University of Michigan’s Transportation Research Institute. Coming in first was the 45- to 54-year old age bracket that also includes boomers, the data showed.
Bottom line? “Baby boomers are your best customers,” Michael Sivak, author of the study, told Credit Union Times.
The research tracked data in 2007 and 2011 and examined the differences in the probability of licensed drivers purchasing a new light-duty vehicle, including cars, pickup trucks, SUVs and minivans, as a function of their age.
While the peak probability of buying a new vehicle per driver occurred among those between 35 and 44 years of age in 2007, a shift occurred in 2011, when those between 55 and 64 years of age moved to the top of the ranking, according to the study.
“The present findings suggest that marketing efforts that focus on drivers 55 to 64 years old should have the highest probability of success per driver,” Sivak said.
For some credit unions, it may take some convincing to shift their marketing efforts towards boomers and away from Gen Y. The industry is in the midst of a movement to woo younger members. According to CUNA, the average age of a credit union member was 47 years old in 2012 and has been steadily moving up since 1989 when that figure was 42.8. Advocates say younger members between the ages of 25 and 44 are in their peak borrowing years and they can potentially provide the foundation for membership growth in the future.
While the $7.3 billion, San Antonio-based Security Service Federal Credit Union’s auto lending program doesn’t specifically target boomers, the cooperative’s success in this area has likely touched this demographic, said John Worthington, executive vice president and chief communications officer.
“As we have a dominant market share in auto lending in all of our markets, we know that we will be getting a significant percentage of boomers among those loans and do not specifically market to them,” Worthington said.
Indeed, Security Service is on a roll with its vehicle financing. New and used car loans have surpassed the $548 million mark, according to the credit union. In August, the financial institution was ranked fifth among prime retail credit lenders in the country by the J.D. Power 2013 U.S. Dealer Financing Satisfaction Study, among nearly 4,000 retail credit lenders in the country.
Worthington said he’s not astonished at some of the findings from Sivak’s study.
“As the boomers have aged and generally acquired more wealth, it is not surprising that they are a dominant demographic in the car buying market, especially as the economy is showing some signs of recovery,” Worthington explained.
Sivak said besides boomers having the most driver’s licenses, another trend that highlights their auto lending influence can be found in the recent recession. After peaking at 17.8 million units in 2000, the sales of light-duty vehicles plummeted to 10.6 million units in 2009 before rebounding to 14.8 million in 2012.
In 2011, for those between the ages of 55 and 64, one vehicle was purchased for every 14.6 drivers. Looking at even older car drivers, for those 75 years of age and older, one vehicle was purchased for every 26.6 drivers. By comparison, in the 18- to 24-year-old category, one vehicle was purchased for every 221.8 drivers.
Next Page; Cash Customers
Because baby boomers tend to have higher than average income, they are also more likely to pay cash to buy their new vehicle than a typical consumer, said Blair Korschun, president of CU Direct Connect, a Centennial, Colo.-based vehicle lending CUSO that serves 34 credit unions. They are also likely to put more money down, which lowers the loan to value and therefore, lowers the risk of a loan, he noted.
“(We) can see where baby boomers would be among the largest buyers of new cars for several reasons,” Korschun said. “Baby boomers are generally still in their peak earning years and their net worth is typically higher than a younger person’s. Also, new cars cost much more on average than used cars. Boomers are likely to have better than average credit scores because of their higher than average income levels.”
Many boomers are past the large expenses of college tuition and wedding costs and tend to have more discretionary income for larger purchases such as a new car, Korschun added.
CU Direct Connect does not target older members because a person’s age cannot be used for loan pricing or for credit approval decisions and the CUSO is very concerned about maintaining proper compliance including avoiding any risks related to possible discrimination, Korschun said. However, boomers are still good marketing targets for credit unions as they have larger than average deposits, he said.
“So as our participating credit unions grow their baby boomer segment, our CUSO in turn has more baby boomer credit union members approaching dealers for loans,” Korschun said.
CU Direct Connect has funded more than $8 billion in auto loans in Colorado since 2004 with approximately 25% being new car loans and 75% comprising used car financing, according to Korschun. Because there is a great deal of competition for low risk and high credit score paper, the resulting profit margins on boomer loans will likely be lower than on consumers with lower credit scores or who put less money down, he pointed out.
“Maintaining a mix of consumer types, including boomers, is important to achieving blended risk and profitability targets for a credit union’s portfolio,” Korschun said.
Rather than create an environment of “us versus them,” when it comes to younger and older members, there may be room to bring the two together to boost the bottom line. Even though the boomers are the ones signing the dotted line for new car loans, research from Deloitte and CU Direct Corp. both indicated that 61% of Gen Y has directly influenced their parents’ automotive purchasing decisions, said Bob Child, chief of staff at CU Direct Corp., a national lending service provider in Ontario, Calif.
“While loan volumes have increased, lenders remain risk adverse, Child offered. “Low FICO approval rates remain extremely low compared to 2008 and earlier, making it harder for Gen Y and X to obtain new car loans.”
Across the CUDL credit union auto lending platform, boomers comprise 36% of all loan applications and nearly 43% of new car applications, Child said. With a total of $6.5 billion of loan application volume through July, CU Direct credit unions collectively have experienced 17% auto loan growth in 2013, he added.
There are several factors driving the CUSO’s growth, Child suggested. The average age of the used car on the road today is over 10 years old, putting more boomers in the market for new cars. This year also represents one of the highest years of new car introductions by auto manufactures in years.
Sivak said he expects the trend of boomers buying more cars to continue for quite some time.
“The emphasis on this relatively older age group is further supported by the expected continuation of the graying of the general population and the consequent continuation of the increase in the number of older licensed drivers,” Sivak said.