The number of people taking out loans to pay for purchasing cars has been dramatically rising over the past few years. According to an automotive financing company, after the economic recession the car industry is seeing a resurgence of customers wanting to buy cars. Figures reveal nearly 75 million Americans have a current car loan account which amounts to a historically high £1.01 trillion as of 2016. This number of people financing their auto purchase contracts is nearly 5 million higher than the same period the year before. A resurgence in customer trust in the economy is an obvious motive for the rapidly increasing auto financing market, however, this a growth of this magnitude hasn’t been observed in many other spheres. An analysis of several reasons of this expansion will be broken down in categories below.
With the price of fuel for cars at one of the lowest levels in recent history, it makes for obvious sense why Americans are not as concerned about running costs for their vehicles as compared to several years ago. According to the Fuel Institute, the majority of cars sold before the drop in global oil prices were light vehicles and small cars. Heavier cars didn’t make the bulk of the vehicles sold in the U.S. till 2014. By this time, SUVs and Crossovers made up the largest share of vehicles sold in the country. However, their increase in sales didn’t come at the expense of smaller cars. The number of smaller cars like hatchbacks and small saloons maintained their market share whereas the number of heavier vehicles sold gained momentum. This expansion of the market size formed the majority of the increase in cars sold recently.
It is therefore obvious that due to the attached running cost of a car dropping, the number of vehicles prospective car buyers had financed had conversely increased. A market analyst from an online car financing company explained this trend by saying that since a car buyer can maintain their personal transport at a cheaper level due to the drop in gas prices, they are less hesitant to take out a finance for a vehicle. Their line of thinking is likely that the cost to benefit ratio has tipped in their favour with the fact that they can more than likely buy a gallon of gas for about £2.
Low Interest Rates:
Although the interest rates for car financing have gone up in the past couple of years by a sliver, it is still in a historically low range. At just about 4.7% interest rate, it becomes very attractive for car buyers to take out a loan to finance their vehicle. As the U.S. Prime Rate maintains its low rating at 3.5%, car financers are more than willing to accept requests from buyers for extending them credit.
In order to drive down premiums further, car financers are increasingly offering repayments over a longer period of time. For example statistics have shown that compared to a few years ago, when the average car finance stretched over five years, now one-third of new car auto loans last at least six years. With the availability of easy credit and finance options spread over a longer period of time, it makes sense that buyers would be tempted to take out loans to buy a car.
The interest rate being offered on used cars can be lower than that of a new one, explains a credit score analytical company. With the current brisk momentum of car sales in the country, it means that there are more cars on the road. It also means that there are more later model, low mileage cars up for sale. Opting for a finance on a used car can save a borrower several thousand dollars over the course of their loan period.
More Expensive Vehicles:
When a customer has financial stability, they are more than likely to make purchases that are luxury based. They might go on a cruise or opt to buy a new car. Whatever the choice, it is the current economic environment in the U.S. As the recession becomes a memory of distant past, people are feeling more secure in the financial decisions they make, which means they keep a lookout for more expensive luxuries. This can be seen in the increase in sales of large vehicles like SUVs and Crossovers. The car manufacturers have also become aware of this financial security and are offering their customers more gadgets and in- car entertainment systems. With longer and lower financing options becoming the norm, customers feel confident in their ability to repay their loans and chose more luxury while making a car purchase.
Delinquencies in repayment of finance contracts have recently remained flat showing that while customers are borrowing more, they are also tying themselves in for longer periods of time, while ensuring that they can make their payments.