Industry experts have confirmed multiple times that millennials are major players in the auto finance market, debunking the notion that they don’t buy cars. The key to their presence in the market and to attracting more of them, Dealertrack says, is a low monthly payment.
Last year millennials, which Dealertrack defined as consumers ages 18-34, made up 35 percent of auto loan originations, and that share will continue to grow, especially with levers to keep monthly payments low, Jason Barrie, Dealertrack’s vice president of market performance, lender, sales and F&I solutions, told Automotive News.
“What we have heard from the broader market is that monthly payment is an important variable to finalize the deal for a consumer,” he said.
Leasing and loan-term options are increasing millennials’ footprint in the market.
In 2012, millennials’ average loan term was 68.9 months on a new vehicle. Through July 31, 2016, the average was 70.5 months. Millennials tend to favor adjustable-term loans over leases, according to Dealertrack’s data. There were about 19 loans per one lease transaction from July 2015 to July 2016. (In 2016, millennials are 18-35 years old, according to Pew Research Center.)
Compared with the previous two periods, though, the ratio has shifted toward leasing. From July 2013 to July 2014 and from July 2014 to July 2015, there were 24 loans per one lease transaction.
A further look into the data confirms millennials indeed are becoming more comfortable with leasing. Through July of this year, 27 percent of lease credit applications were from millennials, compared with 20 percent in 2012, showing that millennials who have eligible credit are interested in leasing, Barrie said. Of the millennials on Dealertrack’s network that applied for a lease through July, 82 percent were approved.
Lease originations jumped 7 percent from 2015, possibly because millennials are looking for a short-term experience, Barrie said.
“Millennials are experiential buyers,” he said. “Leases could be a good option because it’s short-term; there isn’t a sense of ownership” and they provide flexibility.
Rise in subprime
Another trend Barrie noted is a rise in subprime lending among millennials.
“It’s not necessarily surprising,” he said. Millennials are entering the market for the first time, and a car loan will help build their credit.
Through July, 43 percent of subprime credit applications on the Dealertrack network were from millennials, an increase of 15 percentage points from the first seven months of 2011 but only 3 from the 2015 period.
As millennials get older, “they are in the market to purchase and finance vehicles,” Barrie said. “A percent of that population has poor credit.”
According to Pew Research Center, in 2014, 32 percent of millennials lived with their parents, some for financial reasons and others by choice. That lifestyle could lead to car ownership, Barrie said. The more millennials save on cost of living, the more income they will have to put toward a vehicle.
Despite the lean toward subprime, the three trends confirm that millennials are in the buying market, Barrie said. “The challenge they have is to hit a monthly payment in budget.”