Home Blogs Chemicals and the Economy Average US auto loan term hits record 68 months in May

Average US auto loan term hits record 68 months in May

Consumer demand
By Paul Hodges on 04-Jun-2015

US housing Jun15bMay was “another fantastic month for US auto sales”.  Or, it took the industry “one month closer to an inevitable downturn”.  All depends on which analyst you talk to:

  • Ward’s Autos called May’s sales the best since July 2005
  • LMC Automotive suggested growth rates were slowing, and could possibly even contract next year

It also depends on how many questions you ask.

The headline numbers are clearly good.  And they are not being achieved by major discounting, which was the position last year.  Then, average incentives had hit $2633 in February, and headed higher into the peak spring selling season.

But look a little deeper, and problems quickly emerge.   Prices in the used car market have begun to fall, with those for some “near-new” compact vehicles down 2.8%, and midsize values also weakening.  The reason is better availability, as buyers trade-in used cars for new leases.

The US Federal Reserve’s cheap credit policy has meant that 4 out of 5 auto sales are now bought with credit or leased.  Effectively, therefore, it is helping to grow the “sharing economy”, where drivers no longer feel the need to actually own the vehicle they drive.

This has good and bad results.  In the short-term, it means automakers can increase prices and margins, and still make sales as the cost is spread over a longer period.  But in the medium-term, it means they must expect to see lower sales in future years.  The reason is simply that lease terms have been rising to unheard-of levels.

The average US auto loan is now at 67.9 months, which means it will be 2021 before the buyer comes to the end of the loan period.  And as the chart shows, these changes in the market are challenging the dominance of the “Big 4′ US manufacturers:

    • Their combined share of the total market is now just 60%, well down from the 73% seen in Q2 2005
    • GM’s share is down at 18% versus 32% then (blue); Ford has slipped to 15% from 18% (green)
    • Toyota has recovered to 15% after its recalls (purple); FiatChrysler has slipped to 12% from 15% (red)

Volkswagen highlights the pressure they are under.  With an ageing fleet line-up, it is now forced to offer its Jetta model on a lease costing just $39/month in San Jose California, or between $89 – $99/month more generally.  You could end up paying more per month for some mobile phone packages.

And, of course, there is always car-sharing itself.  Ford have now followed BMW and Mercedes in entering the market with its new Go!Drive brand.  And each shared car takes 17 privately owned vehicles off the road, according to industry estimates.

Of course, many people will still want to drive their pick-up trucks and SUVs.  But there are clearly an increasing number of people who are looking for new ways of meeting their need for mobility.  As a result, it seems likely that the US auto market will look quite different in 5 and 10 years time.