Schaumburg, Ill., June 1, 2023 — To offset rising interest rates, some vehicle shoppers opted for shorter term loans in the first quarter of 2023. According to Experian’s State of the Automotive Finance Market Report: Q1 2023, the average loan term for a new vehicle for near prime, prime and super prime consumers decreased by as much as one month.
With the average interest rate for a new vehicle reaching 6.58% in Q1 2023, up from 4.10% the previous year, much of the growth in shorter term loans was experienced in the 1- to 48-month segment (where it increased from 9.53% in Q1 2022 to 12.47% in Q1 2023). Similarly, the percentage of new vehicle loans with 49- to 60-month loan terms increased from 16.55% to 17.37% over the same period. Meanwhile, the percentage of new vehicle loans with 73- to 84- month loan terms decreased from 35.56% to 31.56%.
“Oftentimes when consumers shop for a vehicle the main priority is securing a low monthly payment, but it’s also important to assess the total cost of the loan, particularly amid rising interest rates and vehicle prices,” said Melinda Zabritski, Experian’s senior director of automotive financial solutions. “While shorter term loans are usually accompanied by lower interest rates, right now OEMs seem to be offering additional incentives on shorter term loans, which is driving much of the growth in the 48-month segment.”
Prime and super prime consumers returning to used vehicles
Increases in average vehicle loan amounts continued to taper off, and in some cases fell, in Q1 2023. The average new vehicle loan amount ($40,851) only increased $1,213 from a year ago, compared to the $4,255 increase from Q1 2021 to Q1 2022. The average used vehicle loan amount ($26,420) decreased $1,590 from the previous year.
Despite the increase in the average new vehicle loan amount continuing to level out, many prime and super prime consumers returned to the used vehicle market in Q1 2023. Prime consumers made up 42.41% of used vehicle financing during the quarter, up from 40.97% the previous year, while the percentage of super prime consumers increased from 11.43% to 13.60% over the same period.
“The industry continues to keep a watchful eye on some of the inventory challenges and rising vehicle prices, as it’s impacted consumer purchasing behavior,” said Zabritski. “We’re seeing consumers bring more cash and trade-in value to the transaction in hopes of minimizing the amount of interest they’d have to pay on their loans. Additionally, with the combination of fewer new vehicles on dealership lots and high prices, in-market consumers are choosing used vehicles as another way to control vehicle costs.”
Additional findings from Q1 2023:
To learn more, watch the entire State of the Automotive Finance Market: Q1 2023 presentation.
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