Auto Buyers Are Committing to Leasing and Long-Term Loans at Record Levels

buying a car

WESTLAKE VILLAGE, CA--Feb. 26, 2014: The use of long-term loans and leasing for new-vehicle retail sales is on pace to reach record levels in February, according to an analysis by J.D. Power.

Long-term loans—classified as loans that are 72 months and longer—account for 33.1 percent of new-vehicle retail sales in February 2014, according to data gathered by the Power Information Network (PIN) from J.D. Power. If that pace continues, February will set a new record for long-term loans as a percentage of new-vehicle retail transactions in a single month. The current record was set in September 2012, when 30.6 percent of new-vehicle sales were loans of 72 months or longer.

Simultaneously, lease penetration is at its highest level on record, representing 26.5 percent of retail sales in February. The current record for lease penetration in any month is 26.0 percent, which was set in May 2000.

"Longer loan terms, coupled with the current low interest rate environment, increases the affordability of new vehicles for consumers," said Thomas King, senior director of PIN at J.D. Power. "This is resulting in strong demand for new vehicles and also record transaction prices."

The industry is on track to reach its highest-ever average transaction price for the month of February, with prices exceeding $29,000, surpassing the previous record from February 2013 by nearly $400.

King noted that while the increased use of long-term loans has caused concern in the automotive industry about the risks associated with extended purchase cycles, those risks are mitigated by a couple of factors. First, while 72-month loans are becoming increasingly popular, loans for 24 to 60 months are keeping the average term for new-vehicle loans at 66 months, an increase of only three months since 2009. Second, increased leasing, with typical contract lengths of just 36 months, ensures a healthy supply of future vehicle buyers with shorter purchase cycles.

"Unlike buyers who finance their vehicle and have considerable discretion regarding when to return to market, consumers who lease their vehicle must come back into the market when their lease terminates," said King. "The current level of leasing means there will be a steady and significant stream of lessees returning to market three years from now."

J.D. Power also finds that while loans of 84 and 96 months are available to consumers, such loans have yet to compose any meaningful portion of the auto financing market, with 84-month and longer loans comprising only 3 percent of all sales in February.

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