Used Financing Grows

December 06, 2019

Used vehicles are commanding a larger share of the U.S. automotive finance market, according to Experian’s Q3 2019 State of the Automotive Finance Market report. Used financing increased 2.4 percent year-over-year, reaching 55.15 percent, compared to 53.86 percent a year ago. The trend appears to be driven by a number of factors, including a higher percentage of prime customers financing used vehicles and an increased availability of late-model vehicles.

While used vehicle loans saw growth in the third quarter, the most significant shift was in the super prime segment, increasing 3.3 percent to reach 13.42 percent. As a whole, prime and super prime consumers make up 51.24 percent of used loans - the highest percentage since 2009. Even when financing used vehicles, consumers continue to lean toward longer payment terms, with used terms clocking in at 64.89 months, and average new vehicle loan terms reaching 69.28 months. Independent dealers saw an increase in prime and super prime financing, with both segments making up 37.92 percent of loans, compared to 34.87 percent a year ago. Independent dealers also saw an increase in average used loan terms, from 60.86 months in 2018’s third quarter, to 62.59 months this year.

The average credit score for a used vehicle risen 12 points, to 662, over the past four years.

Nearly 70 percent of Americans (69 percent) would be likely to consider a used vehicle for their next auto purchase, according to a survey from Ally Financial conducted online by The Harris Poll among more than 2,000 American adults.

Even though 69 percent of Americans would be likely to consider used vehicles for their next vehicle, they expressed concerns about their reliability and repair needs, the survey found.

According to the survey, consumers would be more likely to purchase a used vehicle over a new vehicle with the following attributes: Higher-quality used vehicles (40 percent); Vehicle certified by dealer or factory (39 percent); Detailed maintenance/repair history report of the vehicle (36 percent) and a vehicle service contract that extends the warranty or covers major repairs (34 percent).

Used car owners say they currently own used because: It was less expensive than a new vehicle (61 percent); they liked the brand/model of the used vehicle (40 percent) and they were able to get more car for their money (34 percent).

In the September 2019 Used Car and Light Truck Guidelines Industry Update, analysts at J.D. Power Valuation Services note the used vehicle market continues to perform well. Through August, used vehicle prices are on average 2 percent greater than during the same 8-month period in 2018. In terms of August, the used vehicle market’s performance was also better than historic figures for the period. As a result, the J.D. Power Valuation Services’ Seasonally Adjusted Used Vehicle Price Index increased by 0.7% – relative to July – to 123.6.

Highlights include:

  • Wholesale Prices Decline in August
    • Prices down by an average of 0.4 percent
  • Used Vehicle Price Index Increases
    • Index reaches 123.6
  • New Vehicle Sales Increase
    • SAAR reaches 17M
  • Incentive Spending Increases
    • Average spend up 7.1 percent

“At an industry level, used vehicle prices are expected to remain relatively strong moving forward,” said David Paris, executive analyst at J.D. Power Valuation Services. “From where prices are currently through the remainder of the year, we are expecting a mild decline, which barring any serious weather impact or economic changes should hold true. Used supply will be mixed, positive for cars, negative for SUVs and trucks. The impact of other factors including gas prices, home prices, and labor conditions are is expected to be neutral-to-supportive of used prices.”

A new Edmunds report spotlights the benefits of buying used over new vehicles. According to the latest Used Vehicle Report released by Edmunds, the price gap between a three-year-old vehicle and its new model was the highest ever recorded for the second quarter.

Buyers could have saved $14,443 on average if they purchased a 3-year-old used vehicle instead of its new equivalent. Edmunds analysts attribute this in part to new car shoppers opting for higher trim levels and more options on larger vehicles. Ten years ago, the average sticker price of a new vehicle was $6,500 above the base vehicle price; in the second quarter of 2019, the average sticker price was $10,042 above the base vehicle price.

Edmunds experts said car shoppers aren't paying the same premium for those features in the used market. Edmunds’ report reveals that in many instances, a trim level might cost $10,000 over the base model when new but command less than half of that premium on the used market. For example, in 2014 a new Honda Accord at the highest trim level cost $10,278 more than the base model. Today, a used 2014 Honda Accord at the highest trim level only costs $4,402 more than the base model.

Used cars made up more than half of the total auto finance originations for Ally Financial Inc. in the second quarter.

Ally financed $5.3 billion worth of used-car sales in the quarter, accounting for 53 percent of total originations.

Overall, consumer auto originations increased to $9.7 billion from $9.6 billion in the prior year period.

New-car originations made up $3.4 billion of originations and leases made up $1.1 billion.

Ally’s pre-tax income for the auto division was $459 million, $77 million higher year-over-year, reflecting higher net financing revenue partially offset by higher provision for loan losses and higher noninterest expense. Net financing revenue was $97 million higher year-over-year primarily due to higher retail auto and commercial auto yields, higher retail auto balances and higher lease gains.

Retail auto portfolio yield increased year-over-year to 6.58 percent while commercial auto portfolio yield increased year-over-year to 4.75 percent.

Provision for loan losses increased $10 million year-over-year largely driven by higher retail auto reserve release, which included hurricane activity, in the prior year period. This was partially offset by lower retail auto net charge-offs.

The retail auto net charge-off rate declined year-over-year to 0.95 percent.

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