Something interesting is happening when it comes to people with good credit buying cars: they’re shifting away from used vehicles, back into financing new vehicles.
According to Experian’s latest 2020 State of the Automotive Finance Market report, 44% of super prime consumers selected used vehicles in fourth quarter of 2020. That is down from 47.03% in the fourth quarter of 2019.
The report also revealed 60.38% of prime consumers chose used, compared to 63.75% during the same period last year. The report comes as analysts predict strong sales for March, mirroring the steady march back to normal sales results from previous months.
“The events of 2020 disrupted the automotive industry and we’ve seen some consumers shift away from patterns that have been cemented over previous quarters such as opting for used vehicles,” said Melinda Zabritski, Experian’s senior director of automotive financial solutions.
“While we can likely attribute some of the change to stimulus checks, carry-over incentives and tight inventory, we find ourselves in uncharted territory. Leveraging data to better understand patterns and trends will help lenders and dealers make the most strategic decisions in the days to come.”
Shift began earlier in year
Experian’s study shows that this decline just didn’t start in the fourth quarter of 2020. These results followed a trend that began earlier.
Total originations for prime and super prime consumers increased in fourth quarter of 2020, reaching 44.24% and 22.13%, respectively. Subprime total originations, on the other hand, were down in the fourth quarter. Subprime originations made up 14.35% and deep subprime dipped below 2% for the first time at 1.98%.
These observations make sense, said Mark Schirmer, spokesman for Cox Automotive. He said he couldn’t speak speficially to the Experian report, but Cox has made some of its own observations on car purchasing during COVID.
Two types of consumer recovery
“We have what is called a ‘K’ recovery right now,” Schirmer said. “Think of a K has having two spikes coming from the straight back line. One spike goes up and one goes down. The up one represents people who have kept their jobs during COVID. The down one represents people who lost their jobs.”
Those who have kept their jobs have money to spend, but nothing to spend it on. They can’t travel or go to restaurants or enjoy other entertainments, he said.
However, they can spend money on new cars. Not only are they doing just that, but also they are spending more on more expensive cars. Since they also enjoy the best FICO scores, which means they can get really low interest rates to finance a purchase. Lower payments mean they can spend a little more on cars.
“We’ve also noticed people spending money on home improvements, which also makes sense,” Schirmer said. “Being stuck at home for a year, you’ll want to fix the place up, and if you don’t have anything else to spend the money on, why not?”
EVs/Hybrids growing in popularity
Electric and hybrid vehicles have steadily gained popularity in recent years. In the fourth quarter of 2016, for example, electric and hybrid vehicles made up less than 3% of financing.
That number has more than doubled in the last five years. In fourth quarter of 2020, electric and hybrid vehicles represented 6.72% of vehicle financing. Taking a closer look at what is being financed, Toyota leads with the greatest market share of electric and hybrid vehicles, at 38.57%.
This was followed by Tesla at 25.82%. Rounding out the top five are Honda (8.4%), Lexus (5.47%) and Ford (3.72%). The Tesla Model Y was the most popular electric or hybrid model financed in fourth quarter of 2020, at 13.3%, with the RAV4 coming in at number two at 11.19%.
While electric vehicles tend to have a higher average monthly payment than hybrid vehicles, both saw slight increases in the fourth quarter of 2020.
The average monthly payment for electric vehicles increased from $671 in fourth quarter of 2019 to $689 in fourth quarter of 2020, while hybrids increased from $509 to $529 over the same period.
Americans still love big vehicles
Overall, average vehicle loan amounts and monthly payments continue to rise. A consumer preference for larger, pricier vehicles, such as pickups and SUVs, resulted in more than 50% of new vehicles financed in fourth quarter of 2020 being small and midsized SUVs, according to Experian.
The average loan amount for a new vehicle increased nearly $2,000 year-over-year to reach $35,228 in the fourth quarter of 2020, while the average monthly payment increased $13 to $576 during the same period.
Similarly, the average loan amount for used vehicles grew from $20,824 to $22,467 year-over-year, while average monthly payments increased $18 to surpass $400 for the first time, reaching $413 in the fourth quarter of 2020.
Overall, total open automotive loan balances grew 2.8% year-over-year, reaching $1.27 trillion. The average loan term for new vehicles was 69.7 months and for used vehicles came in 65.6 for used vehicles.
These happened as interest rates dropped, helping buyers get more vehicle for the same monthly payment. The average interest rate for a new vehicle loan dropped from 5.25% in fourth quarter of 2019 to 4.31% in fourth quarter of 2020, while the average interest rate for used vehicles dropped from 9.05% to 8.43% in the same time frame.