One sector that has come roaring back from recessionary lows is the U.S. auto industry. While Americans are driving 7.2% less than they did before the 2008 recession, they are still spending more on their vehicles.
The average household allocates 6.2% of its total annual spending, or $3,200 per year toward the purchase of automobiles, according to the U.S. Bureau of Labor Statistics. In addition, the average household spends another $223 on auto finance charges each year, and $6,600 annually on fuel and vehicle repairs.
A recent report from the consumer finance site Wallet Hub analyzed auto financing offers from 137 lenders from community banks and credit unions to national banks and car manufactures in search of useful benchmarks and new finance trends. The report compares rates buyers can expect to pay on financing obtained from banks, credit unions, and car manufacturers. Following is how the different areas compare on interest rates. (All rates based on 36-month term.)
• Community banks
New car: 4.53%
Used car: 5.51%
• Regional banks
• National banks
• Credit unions
• Auto makers
new loan: 2.46%
new lease: 4.35%
LOANS, LEASES & RATES
The report found car manufacturers offered lower interests on average than banks or credit unions. But, researchers note, buyers should be aware that car dealers may inflate the “lowest available interest rate” for a bigger payoff on the back end of the loan. Car manufacturers charge 7% lower interest rates, on average, than banks and credit unions.
Car manufacturers charge 43% lower interest rates for a 36-month loan than for their average lease program. The report notes at 81% of the dealerships surveyed consumers who planned to keep their new car for three years were better off financing the car, than leasing it.
Wallet Hub also notes that the spread between new and used car finance options has widened to its broadest gap in two years. Consumers will pay 15% less interest over the life of a loan on a new car compared to a used car.
Credit unions are popular financing options and recent data indicate the rates were 40% lower than traditional banks for new car loans. Used-car loans were 44% less expensive at credit union, compared to banks.
The report also notes that interest rates among smaller banks were about 60% more expensive that national banks or credit unions. Term loans are usually capped at 72 months at traditional banks, while credit unions extend loans to 96 months for new models and 84 months for older ones. Interest rates of bank car loans have fallen by 10% since early 2012, having stabilized in recent months.
GLUT OF USED CARS?
“We’re projecting an increase in auto sales in 2014 as consumers’ needs align with a buyer’s market,” said Rich Porrello, director of Huntington Bank’s auto finance division. “And we’re witnessing tremendous consumer enthusiasm at sponsored auto shows across the Midwest in response to the increasing sophistication among manufacturers that are pushing to define a whole new generation of cars and trucks on the road today.”
Porrello said 55% of its survey respondents said they will buy or lease a new car in 2014, up from 52% last year. The Huntington survey also noted that 30% of respondents said they will choose a used car in 2104, versus 32% a year ago.
Edmunds.com reports a glut of vehicles hitting used car lots will drive down prices as much as 2% this year. While that might be good news for those in the market for a used car, Edmunds.com said the trend will likely cause a ripple effect, influencing shoppers of new and used cars.
“Many car shoppers might not realize how much the new- and used-car markets feed off each other," Edmunds.com Sr. Consumer Advice Editor Philip Reed said in a statement. "The boom in new car leases, for example, is leading to a higher number of lease returns, which adds to the growing inventory of used cars, forcing their prices down."
Reed cautions the drop in used-car values could raise the monthly payments of new car leases. Softer "residual values" — a decline in what a car is worth at the end of the lease – are likely to cause higher monthly payments to make up the difference.