Cars take 34% longer to enter used market
Three other factors besides vehicle dependability triggered a 34-percent spike during the past 12 years in the average time for a new vehicle to enter the used market for the first time.
According to the latest report from the Used Car Guide division of J.D. Power, that average time moved from 48.2 months in 2003 to 64.7 months in 2014.
Analysts arrived at the metrics after reviewing IHS Automotive registration data.
Used Car Guide acknowledged vehicle dependability certainly played a significant role in the trend, but three other factors did, too, including:
- Economic conditions
- Automaker discounts
- Finance terms
With those trends in mind, here are two key takeaways dealers, finance companies and other industry observers should digest.
J.D. Power Power Information Network (PIN) data indicated that new vehicle length of ownership is "more or less" keeping pace with progressively stretched loan terms, report authors surmised. PIN data put installment contract terms year-to-date at an average of 67.3 months.
"Certainly the trend toward longer loan terms isn't without tangible risk," analysts said.
"For example, longer terms increase the time required to reach positive equity," they continued. "But it's much less likely the vehicle will suffer a significant operational failure before the loan is paid in full.
"Consumers and lenders wouldn't be as willing to take on the added risk if it were," the report goes on to say.
Further cementing the point about risk is this: Experian Automotive pointed out that average amount financed to complete a new-vehicle installment contract during the second quarter increased by $1,095 year-over-year to come in at $28,524.
The other takeaway Used Car Guide wanted to leave with the industry is how all of these elements are combining to impact the consumer purchase cycle.
"The longer the length of ownership, the more time has to pass before a consumer is back in the market for another new or pre-owned vehicle," analysts said.
Earlier this year when Experian Automotive only had Q1 data to share, analysts spotted that contracts with terms lasting 73 to 84 months accounted for a record-setting 29.5 percent of all new vehicles financed, marking an 18.6 percent rise above Q1 2014 and the highest percentage on record since Experian began publically tracking this data in 2006.
In Q2, that level of 73 to 84 months contracts came in at 28.8 percent, slightly lower than the record established a quarter earlier. However, the reading still marked a 19.7-percent climb year-over-year.
Experian Automotive offered this assessment after the record was set earlier this year.
"While longer term loans are growing, they do not necessarily represent an ominous sign for the market," said Melinda Zabritski, Experian's senior director of automotive finance and a keynote speaker for the SubPrime Forum during Used Car Week.
"Most longer-term loans help consumers keep monthly payments manageable, while allowing them to purchase the vehicles they need without having to break the bank," Zabritski continued. "However, it is critical for consumers to understand that if they take a long-term loan, they need to keep the car longer or could face negative equity should they choose to trade it in after only a few years."
The report from the Used Car Guide referenced above is titled, "Lasting Longer: How Better Quality is Affecting Used Vehicle Demand." It discusses how new-car quality and durability has increased significantly over the past two decades, and notes how this is having a strong impact on how these cars are bought and sold as used vehicles.
By Auto Remarketing staff