Affordability of new cars extends loan terms

The myth of the subprime bubble in the auto lending industry was dispelled by a leading analyst today at a conference of consumer finance company executives and state regulators.

Melinda Zabritski, Senior Director for Experian Automotive’s financial solutions team, addressed the 20th annual state government affairs and legal forum jointly hosted by the American Financial Services  Association (AFSA) and the National Association of Consumer Credit Administrators (NACCA).

“What happens in auto finance affects the whole consumer credit industry,” said. “The subprime bubble is not an issue of a bubble, because it’s a cycle. The real issue is affordability because that changes what people buy and how they buy.”

She said in the mid 1980s, car loan terms started to increase from 46 to 52 months. Today, more than 1 in 4 loans are 73+ months with some reaching 84 months. In Q4 2017, average car loans were at $31,000 with an average loan rate of 5.1%. That would translate into a vehicle loan for 48 months at $717 a month. But by increasing the loan term to 72 months the average monthly payment drops to $502. At 84 months, the monthly payment is $440.

But the most revealing statistic Zabritski cited was that the average per capita income in the United States also is $31,000, the same figure as the average new car loan. In the past 10 years, the average new car loan amount has risen from $24,000 to today’s $31,000.

“The average American can’t afford a new car,” she said. “The 72-month car loan is not new. It made up just over 10 % of the auto loan market in 2008 but has increased to 23.9% of the market today.”

The affordability issue, she said, helped drive the popularity of leasing in the new car market. Today, leasing is 35% of the car sales vs. 22% in 2006. But rather than luxury vehicles,  the most-leased vehicles are entry-level Honda Civic, Nissan Rogue, Chevy Equinox, Toyota RAV 4 and Ford Escape.