U.S. car buyers borrow more as rates fall and standards loosen
By David Henry
(Reuters) - U.S. consumers buyers are taking out bigger car loans with longer pay-back periods as lenders offer lower interest rates and accept borrowers with weaker credit ratings, a report released on Wednesday showed.
The average loan on a new car climbed to $26,719 in the third quarter, up by $756 from a year earlier, and the most in at least five years, according to data collected by Experian Plc.
Despite borrowing so much more, average monthly payments on new car loans rose only $6 to $458. That is because banks and finance companies were willing to lend at lower rates and grant borrowers more time to repay.
The average interest rate fell to 4.27 percent from 4.53 percent a year earlier and the average loan term stretched one more month to five years and five months, according to Experian.
"The third quarter of 2013 proved to be a good time to purchase a new vehicle, particularly for consumers who buy based on their monthly payments," Melinda Zabritski, senior director of automotive credit for Experian Automotive, said in a statement from the data and analytical firm. "Shoppers perceive they are getting better deals and manufacturers and dealers are boosting sales," she said.
Major automakers reported their best U.S. sales month in 6-1/2 years in November as the industry's annual U.S. sales pace reached 16.41 million vehicles, the best showing since February 2007, according to industry research firm Autodata. That handily beat expectations for a rate of 15.75 million.
The Experian report suggests that easier credit contributed to the sales increase, as did discounts by manufacturers and the popularity of big pickup trucks.
Leasing has also increased and accounted for 27.2 percent of all new financing in the quarter, up from 24.4 percent a year ago and 14.2 percent in 2009.
The Toyota Financial Services unit of Toyota Motor Corp had the biggest share of new leases, with 15.2 percent, according to Experian. Well Fargo & Co made the most loans, with 5.4 percent of the total.
Lenders made 26.04 percent of their loans on new cars to buyers with subprime credit scores, up from 24.84 percent a year earlier, said Experian, which collects car title and financing information to compile its reports. For loans on used cars, the portion to subprime borrowers rose to 54.95 percent from 54.43 percent.
As the lenders made bigger loans, they also extended credit further beyond the value of the vehicles. The average loan-to-value on new cars rose to 110.6 percent, up by 1.17 percentage points. On used cars it rose to 133.2 percent, up by 2.18 percentage points.
Auto lenders often provide loans that exceed the value of cars they are financing because borrowers want cash to pay sales taxes and fees.
Extra-long loans are becoming more common. Some 19 percent of new car loans were made for more than six years, up from 16.4 percent a year earlier.
For lenders, car loans performed much better in the last recession than had been expected. Some lenders have said that strapped consumers were more determined to keep up their car payments than their house payments because they needed vehicles to get to work or look for jobs.
That experience has encouraged lenders to be more lenient with people borrowing for cars. So far, the tactic has largely worked. The percentage of loans 30-days delinquent was down in the third quarter to 2.58 percent from 2.67 percent a year earlier, Experian said.
However, the average loss on loans gone bad jumped to $7,770 in the third quarter from $7,026 a year earlier and repossessions increased sharply, particularly for subprime borrowers.