Financing is still the most common means of paying for a car, but auto leasing is rapidly growing in popularity.
The latest State of the Automotive Finance Market report from Experian Automotive, released March 4, revealed that consumers are choosing leasing options more frequently than ever before. In fact, the share of leased new vehicle purchases reached its highest level since the credit reporting agency first began publishing such reports in 2006. According to Experian Automotive data, 28.4 percent of all new vehicles were leased during the fourth quarter of 2013, representing a significant jump from the 24.8 percent leased during the fourth quarter of 2012.
The average monthly payment for a car buyer who was leasing during the fourth quarter was $420, while financing purchasers shelled out an average of $471 per month. According to Melinda Zabritski, senior director of automotive credit for Experian Automotive, that affordability gap has become an increasingly pivotal factor in the decision-making process, especially for car shoppers seeking to adhere to a strict monthly budget.
"Leasing continues to grow in popularity among car shoppers, especially those hoping to stay within a strict monthly budget," Zabriski said. "Our analysis this quarter showed that the average monthly lease payment was $51 lower than the average loan payment, which can make a big difference to consumers trying to stretch their dollar."
Standards relaxing?
On average, consumers who chose financing options late in 2013 did so at a greater overall price, paying $27,430 for a new vehicle during the fourth quarter - up from an average of $26,691 in the fourth quarter of 2012. The former figure represented the highest amount for an average new vehicle loan since 2008. Meanwhile, the average loan for a used vehicle was $17,974 - also a record high since 2008 - offering an indication that credit standards may be loosening slightly within the industry.
The Experian data supported that hypothesis, revealing that the average credit scores for both approved financing and leasing plans fell from the fourth quarter of 2012 to 2013. The average score for a new vehicle lease fell a full 16 points to 719 in the fourth quarter of 2013, while the average credit rating for those approved for new vehicle financing terms dipped less significantly - from 724 to 715 - over the same period. Perhaps not coincidentally, the market share for nonprime, subprime and deep subprime loans on new cars increased slightly from the fourth quarter of 2012, when it stood at 32.8 percent, to the fourth quarter of 2013, when it had reached 34.1 percent. For used vehicles, nonprime and subprime loans accounted for an even larger bulk of sales, representing 62.8 percent of all loan approvals - though that number was down slightly from the 63.8 percent they represented during the fourth quarter of 2012.
"We are still seeing remarkable stability in the automotive finance industry, even as lenders continue to ease slightly on credit standards to provide loans and leases," Zabritski said. "What makes this good news for consumers is that the more credit-challenged car shoppers who need a vehicle may find that they have more financing options to choose from and can more easily shop around for the best rates and terms."
Data from Experian also revealed that the average monthly loan payment for used vehicles rose from the fourth quarter of 2012 to the fourth quarter of 2013, climbing to $352 from $348. Interest rates were on the rise as well, if only slightly, increasing from an average of 4.36 percent at the end of 2012 to 4.37 percent in 2013 for new vehicles. For used cars, the rate and the annual jump were each greater, rising from an average of 8.48 percent to 8.71 percent over the same period. Interestingly, the average credit score for those purchasing a used car actually rose slightly, from 644 to 646 through the third quarter of 2013.
The long-term route
A separate report from J.D. Power & McGraw Hill Financial, released in late February, supported the notion that more car buyers are committing to leasing or longer-term financing options. According to the J.D. Power report, long-term loans - which are classified as those lasting 72 months or more - accounted for 33.1 percent of new car sales in February 2014, which represents the highest such proportion based on historical report data compiled by Power Information Network.
The same report found that lease penetration remains at near-record levels, accounting for 26.5 percent of retail sales in February. Only in May 2000 was lease penetration in the market place higher, when it stood at an even 26 percent. J.D. Power analysts surmised, however, that the trend may be at least partially attributable to the current low interest rate environment - one that is threatened by the Federal Reserve's commitment to tapering its stimulus program as 2014 continues.