While new vehicle sales in the U.S. continue to lag due to the coronavirus pandemic, used-car sales are seeing much better results during the same time frame.
Last month, new car sales fell nearly 30% while sales of used vehicles jumped 17% above the pre-pandemic forecasts in June after dropping 38% in April, according to J.D. Power. The reasons for the strong performance are multiple.
First, buyers are more likely to find exactly what they want on a dealer’s used car lot rather than the new vehicle showroom when it comes to popular vehicles, especially trucks. While plants were shut down for months, inventory levels of vehicles with popular equipment packages were winnowed down.
(GM, FCA, NIssan suffer big drop in second-quarter sales.)
“Thanks to a shortage of new vehicle inventory, more automakers and dealers have leaned into promoting attractive certified pre-owned programs, which might be driving more typical new car shoppers into the used market,” said Jessica Caldwell, Edmunds’ executive director of insights.
Next is the fact that a one- or two-year-old used vehicle is significantly cheaper than its brand new counterpart. If a buyer can get a vehicle equipped right and not take the depreciation hit that happens when rolling off the lot, the used vehicle becomes a very compelling alternative.
Finally, they’re not only cheaper on the total price, but drops in interest rates on used vehicle – which are typically a couple points higher than those of new cars and trucks – have come down as the federal government has taken steps to try to stimulate the economy.
A 36-month loan is down from 5% in March to about 4.73% on average now. The report also says that some buyers have used their federal stimulus checks on their vehicle purchases.
“More consumers are looking for value in their next car purchase due to the economic challenges of the coronavirus pandemic, so the more favorable loan conditions we’re seeing are likely a direct result of more consumers with good credit shifting into the used market,” Caldwell noted.
(Ford follows lead of other Detroit makers with Q2 sales results.)
Edmunds data shows that interest rates for used vehicles dropped to the lowest level since January 2018, with the average annual percentage rate falling to 7.8% in June, compared to 8.3% in May and 8.6% a year ago.
One thing that may be helping on the used car front are stimulus checks. According to Edmunds, the average used down payment on a used car rose to $3,167 in June, marking the first time its ever eclipsed $3,000 since Edmunds began tracking that data in 2007. It’s also $500 more than just one year ago.
Edmunds data reveals that 26.3% of used vehicle sales with a trade-in had negative equity in June, the lowest level so far in 2020. The demand for used cars has put used car dealers in a bit of a financial bind. The average wholesale price in June likely will finish at an all-time high of more than $14,600, according to Manheim, the massive automotive auction company.
Buyers are looking for deals and deciding what they can live with — and without — since the pandemic started. According to Edmunds website data, more new shoppers are cross-shopping used vehicles. Twenty-nine percent of new vehicle shoppers between mid-May and mid-June also considered used, compared to 24% between mid-January and early March — a 5% jump.
Adding to the demand is what some hadn’t accounted for: more first-time buyers. Edmunds says the number of vehicles coming in on trade dropped last month to its lowest level since February 2009.
(Toyota sees retail market bouncing back fast, but warns there could be “lumps” ahead.)
“The fact that there are fewer people trading in a vehicle when making a car purchase could indicate that there are consumers entering the market for the first time — possibly due to concerns surrounding public transportation — which is an exciting prospect for the industry,” said Caldwell.
Increase in used car sales is a boom to stocks like CVNA and VRM.