Auto-finance trends open 2020 on steady pace

The experts at ALG, Cox Automotive and Edmunds spotted a stable start to 2020 on the auto-finance front, with annual percentage rate (APR) for used vehicles remaining nearly steady and APR on new models moving higher but not dramatically.

Plus, incentives leveraged by automakers actually declined.

According to data from Edmunds, average APR on used vehicles financed in January came in at 8.3%, the same rate as November and just slightly higher than the December average of 8.2%.

Meanwhile, Edmunds found APR on new financed vehicles averaged 5.7% in January, compared to 5.4% in December and 5.5% in November. Edmunds data also revealed that the share of sales with 0% finance deals dropped to 3.6% in January, hitting their lowest level since April of 2019.

“January is a bit of a hangover month for auto sales given that it follows some of the biggest holiday blowout events at the end of the year,” said Jessica Caldwell, executive director of insights at Edmunds.

“Automakers typically rein in the incentives at this time of year, so it’s not unusual to see auto loan interest rates creep up. The good news is that interest rates are still much lower than they were a year ago,” Caldwell continued in a news release.

Edmunds data also showed that the average monthly payment, amount financed, and down payment for new vehicles softened month over month in January. On the used side, Edmunds noticed most of those financing metrics remained steady in January.

Edmunds experts attribute to a drop in purchases of luxury and larger vehicles.

“While December is all about flashier, bigger vehicle purchases, shoppers who make it to the dealership in January are mostly doing it out of necessity and, therefore, are a bit more pragmatic,” Caldwell said.

Cox Automotive elaborated about that sentiment, noting that January auto sales can be greatly influenced by two forces — harsh winter weather and excessive old inventory.

Analysts explained that extreme weather can impact vehicle sales in winter months as shopping dealership lots becomes more difficult for many parts of the country. However, this January did not experience massive snowstorms or cold across much of the country, unlike last year’s “Big Freeze” — a week of subzero temperatures which likely impacted last January’s vehicle sales, according to Cox Automotive.

Analysts added the other key ingredient is inventory levels, and how many old vehicle models remain after the holiday season sell-down incentive programs. Cox Automotive poited out that OEMs generally want only new model years to remain in the market at the start of the year; otherwise, pricing is more challenging, and large incentives may be required.

Cox Automotive data suggests inventory levels have improved in recent months, ending the year at their lowest levels since September 2015.

“Cold and cloudy weather mixed with a post-holiday shopping hangover usually results in little consumer interest and weak sales activity, Cox Automotive senior economist Charlie Chesbrough said.

Furthermore, ALG, a subsidiary of TrueCar, pointed out that automakers resisted the urge to slap a lot of cash on the hood to spark January sale.

ALG reported incentive spending as a percentage of average transaction prices (ATP) for the industry was expected to be 10.3% in January, down 3.2% from a year earlier and down 11.3% from December.

ALG also projected January ATPs to be up 2.0%, or $688, from a year earlier but down 1.6%, or $564, from December.

“In 2019, we saw sustained growth in average transaction price and despite a slight dip in sales for this month, we still expect an increase in January average transaction price year over year as consumers continue to opt for utilities and feature-rich vehicles,” ALG chief industry analyst Eric Lyman said in a news release.

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds