Experian: 62% of borrowers opted for used cars in Q2

Sixty-two percent of auto borrowers financed used vehicles during the second quarter, up 2 points from the first quarter and a 4-point increase from a year earlier, Experian said Thursday.

The flight to used vehicles could be seen across all credit tiers, with the largest gain seen in the 77 percent of near-prime customers financing used models, up 5 points from a year earlier. Experian defines near-prime as customers with credit scores between 601-660.

"Between the inventory shortage and rising vehicle costs, consumers are looking to make the most cost-effective decision, which is often a used vehicle," Melinda Zabritski, Experian automotive financial solutions senior director, said in a statement Thursday. "The benefit of higher vehicle values is that consumers are able to get more for their trade-ins, which can help offset the increased cost of their next vehicle."

Used-vehicle buyers financed record amounts during the second quarter, borrowing $28,534, up nearly $4,500 from a year earlier, and agreed to record monthly payments of $515, up $75 from a year earlier, according to Experian. They also committed to record loan lengths of 68 months, nearly two more months than the terms in the second quarter of 2021.

Zabritski called this increase significant in a Wednesday interview with Automotive News. Historically, loan terms merely inched up by a tenth of a month, according to Zabritski. Starting in the middle of last year, used-vehicle loan terms began to grow by a half-month or more at a time, she said.

Despite these other used-vehicle loan metrics setting records, borrowers saw effectively the same interest rates as they did a year ago. Experian said used-vehicle loans held an 8.62 percent interest rate during the second quarter, up only 0.03 points from a year earlier.

Meanwhile, the federal funds rate, which influences consumer interest rates, rose from 0.07 points in the second quarter of 2021 to 0.77 points during April-June 2022.

Zabritski attributed the minimal increase in used-vehicle interest rates to a greater proportion of customers opting to finance with credit unions, which she said typically charge lower rates than other lenders.

While banks increased their second-quarter used-vehicle interest rates from last year's figure, "credit unions are still lower compared to last year," Zabritski said. Credit unions' rates ran about 2 percentage points lower than banks, she said.

Credit unions held a 29 percent share of all used-vehicle loans in the second quarter — up 5 points from a year earlier and higher than any other second quarter in the past five years.Credit unions also increased their overall financing market share with 26 percent of all new and used vehicles, up 8 points from a year earlier and also higher than in the prior five years.

"With the market dynamics we're seeing right now, the shift in lender market share makes sense, as credit unions often offer two things that consumers are seeking: lower interest rates and longer terms," Zabritski said in the statement.

"This helps to manage their monthly payment, which is often what consumers prioritize when looking at financing options. Understanding these trends will ensure lenders and dealers can help consumers make the most informed decisions when purchasing a vehicle."