Millennials have increased their share of auto loan originations in the past year. But as a demographic, millennials have different buying behaviors than older generations, and the industry has to adjust to their mindset.
Millennials, defined as consumers aged 18 to 34, made up 35 percent of loan originations in 2015, and their share will continue to grow, said Jason Barrie, vice president of market performance and F&I solutions at Dealertrack.
Overall, millennials represent over 83.1 million American consumers, or more than a quarter of the nation’s population.
“If you look at the scope of that size, it’s the largest in U.S. history,” Barrie said. “This is what scares a lot of folks. Because it is such a large generation, the buying power is massive.”
The industry could feel at risk because millennials are buying differently than previous generations, he said.
Millennials financed their vehicles more than they leased in 2015. There were 13.4 loans per one lease transaction, according to Dealertrack. For Gen X, the ratio was 9.3 to 1, and for baby boomers, it was 8.3 to 1.
Millennials increased their total outstanding loan balance 23 percent in 2015, the largest increase of any generation.
Millennials may be attracted to loans because “financing provides some form of equity that the consumer is gaining toward that purchase,” Barrie said.
Monthly payment goal
But leases appeal to millennials, too, largely because they allow a low monthly payment. Lease volume among millennials grew 34 percent last year vs. 2014, Dealertrack’s data show.
Lease application volume for millennials on the Dealertrack Credit Application Network has risen even more, Barrie said. It jumped 60 percent from 2013 to 2015, while overall retail application volume grew 41 percent.
Whether millennials opt for a loan or lease, they can still reach a low monthly payment. The average loan term for millennials who purchased a new vehicle in 2015 was 70.2 months. For used vehicles, it was 65.7 months. Both averages extend a few months beyond the average terms for the population at large. In the third quarter last year, the average new-vehicle loan term was 67 months, according to Experian. The average used-vehicle term was 63 months.
“Term is a powerful lever to get consumers to [the] price point” they want, Barrie said. If “you look at someone who is out of college, they are looking for financial flexibility to get into their vehicle of choice with monthly payment that would fit their budget.”
In 2015, 34.6 percent of credit applications were from millennials, compared with 24.8 percent in 2011, Dealertrack said. As more of them enter the market, their share is increasing.
But the industry’s challenge is to become “savvier in how to engage the millennials” by making car shopping a more interactive experience, Barrie said.
A recent Autotrader study found that 23 percent of millennials aren’t willing to wait 10 minutes for a test drive, 22 percent aren’t willing to wait 20 minutes for paperwork and registration, and 27 percent aren’t willing to wait 20 minutes for financing answers.
Millennials are impatient in the showroom because they expect to be able to get most of what they need to know about buying their vehicle online, such as how it can be configured and their financing options.
When they do go to the physical dealership, it’s not about filling out paperwork or going through mundane processes,” Barrie said. “It’s about being in an interactive experience.”
Millennials want to be part of experience, he said, not a customer being sold to.