This Week in Car
Buying: Leasing and loan balances hit high; Honda Civic, Pilot prices up; Delinquencies
raise concern; Bank of America doubles down on autos
This Week in Car Buying: Leasing and loan balances hit high; Honda Civic, Pilot prices up; Delinquencies raise concern; Bank of America doubles down on autos
Both leasing and the average size of new car loans have hit a new high, according it Experian Automotive, which is explained by Kelley Blue Book data that shows transaction prices also reaching record levels. Experian said lease penetration hit 33.6 percent in the fourth quarter last year, while the average amount financed on a new car hit $29,551, up $1,170 or 4 percent over a year earlier. Further evidence that leasing is not just for high end cars anymore is the fact that the most-leased vehicle in 2015, according to Experian, was the Honda Civic.
The average transaction price for new cars during February was $33,781 -- up 2.2 percent or $739 from year earlier levels. But, the data also showed that transaction prices remained relatively flat from January to February. “Increased incentives are helping offset part of this growth, as incentive spend is nearing pre-recession levels in recent months,” said Tim Fleming, analyst for Kelley Blue Book. “Low gas prices are attracting consumers toward pickup trucks with average transaction prices up a combined 6 percent for the segment. The same growth has not been seen in traditional car segments like compact and mid-size cars, which are both up 0.5 percent or around $100.”
Honda Civic, Pilot transaction prices climb
Several new models, like the 2016 Honda Civic and Pilot, saw substantial gains in transaction prices as a result of a lack of incentives on the respective popular compact and crossover SUV. Civic’s average transaction price was $20,872 in February, a gain of 5.5 percent over last year at the same time when the previous generation model was on sale. Likewise, the all-new Honda Pilot is transacting at an average of $38,238, an increase of 16.2 percent. These numbers indicate that it will be some time before prices moderate or incentives are back in play on these two new models.
These higher transaction prices invariably lead to larger loan balances and Experian estimates that the average monthly car payment now stands at $493, a 2.3-percent increase over a year. “Right now, average dollar amounts for new-vehicle loans are soaring,” said Melinda Zabritiski, senior director of automotive credit at Experian said. This in turn is providing an impetus for buyers to turn “to leasing and used vehicles as cost-effective alternatives to buying new.” The difference in affordability can be seen in the average monthly payments between new and used cars, which at $354 is $134 per month less, the highest recorded by Experian. The average loan balance on used cars is $18,850. Leasing a new car also provides a lower average monthly payment of $412 over financing a vehicle outright.
Delinquencies raise concerns
As the auto loans have grown from $700 billion to over $1 trillion from 2011 to 2015, according to Manheim Auctions 2016 Used Car Report, concerns over delinquencies are beginning to grow. The study says the number of loans seriously delinquent grew from 2.85 million in the third quarter of 2014 to 3.3 million a year later. Still, the report concedes that the percentages of these delinquencies and defaults are still at historic lows.
Two factors are being watched closely in this area. The first is the growth of sub-prime lending (loans to buyers with less-than-stellar credit at higher rates) which is up nearly 5 percent to 22.0 percent of all loans. The other is the increased use of Asset-Backed Securities using auto loans, much the same way real estate loans were packaged in the period leading up to the 2007 financial meltdown. ABS in the auto sector was running at $90 billion from 2012-2014, according to Manheim, but jumped to over $100 billion in 2015, topping that mark only for the second time.
Bank of America doubles down on autos
While some may be nervously looking at the state of the market, preparing for a downturn of one sort or another, Bank of America announced that it is increasing its stake in the auto lending market. Reuters reports that the bank tapped two mortgage execs to lead the beefed up auto division and is looking to increase its auto loan portfolio with good credit borrowers.
The report noted that analysts believe the market is peaking and that banking industry itself classified $1.1 billion worth of auto loans as uncollectable in the fourth quarter of 2015, according to the Federal Deposit Insurance Corp. That represents a 15 percent increase year over year, and a 39 percent gain over 2011. Bank of America ranks 11th among auto lenders, according to Experian, holding just under 2 percent of all auto loans. Ally Bank, formed from General Motors Acceptance Corp. after the automaker’s bankruptcy, is the nation’s largest auto lender with 6 percent, followed by Wells Fargo with 5.57 percent.
Bank of America said it is focused on making loans strictly to prime and “superprime” customers, with most of its borrowers having credit scores about 700.
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