Having bad credit doesn’t mean you won’t get a car loan. But you probably won’t be buying the car of your dreams.
Living in Florida requires a lot of patience. A common cause of frustration is the endless stream of retirees that rush to the Sunshine State, only to make moving slowly into an art form once they’ve arrived. Whether it’s on the road or in line at a store, getting stuck behind a person who has all day to do nothing, including getting to their destination or finishing their transaction, can send you over the edge.
But there is a great time to be stuck behind retirees — when they take their classic cars on the road. It’s common to see cars from the 30’s and 40’s, along with the normal parade of hot rods from the ‘50s and muscle cars from the ‘60s. There is also another place we like to see retirees — turning in their daily driver cars at used car lots.
The cliché about a 10-year-old car with very low miles because it was driven by a little old lady who only took it to church is more than a sales pitch down here, it’s often the truth. This gives Floridians a great supply of low mileage cars. As more boomers join the ranks of retirees, it only makes sense that these cream-puff used vehicles will keep hitting local car lots.
That’s good news for consumers, but not so good news for new car dealers. Unfortunately for this group, the bad news starts long before retirement…
Buying Your Dream Wheels
According to our research on consumer spending patterns, the highest rate of spending on new cars occurs around age 54. This makes sense because if the average kid is born to 28-year-old parents, then that child leaves the house when his parents are right around 50. This gives a 54-year-old more discretionary income to buy the car of his or her dreams. This might not be the last car purchase of the consumer’s life, but so far it has been the most expensive. After that consumers are either closing in on or have already reached retirement, and might lean toward more affordable vehicles, and will keep them longer.
From our immigration-adjusted birth index we know that the peak year of births for boomers was 1961. That group turns 54 in 2015, which indicates lower car sales to the boomers in the following years. As boomers turn this corner, car makers will have to find new markets to keep their volume up. Chances are this will be a tough sell.
As boomers slow their auto purchases, it would be logical to turn to the next largest generation, millennials. This group experienced a surge in births in 1990, which led to a flood of young people reaching adulthood in the late 2000s. With our continued weak economy and an over-supply of labor, millennials are not finding a hospitable job market.
No Job, No Car
While college graduates are still finding employment, 44% are in positions that don’t require a degree, so they are under-employed. To go along with having a job that doesn’t require college, these workers are earning less than their better-positioned peers. In short, the young generation is struggling to make ends meet, which puts a crimp in their spending on big purchases.
This situation is exasperated by the growing use of car-sharing programs and ride services such as Uber, which lessen the need for urban dwellers to have a car at all. If the young generation is not earning as they expected, and have less of a need to own a vehicle outright anyway, what is it that will drive them onto car lots in the years to come?
Bad Credit? You’re Approved!
Luckily, the car industry seems to have figured this out. Instead of foregoing sales or lowering revenue targets, the auto industry has chosen to lend more money to people with bad credit, and extend the terms over a longer period of time. In the first half of 2014, 31% of car loans were to people with poor credit, while 25% of all car loans in the first quarter of 2014 were six to seven years in duration.
This pulled the average car loan to 5 ½ years, which is a record. Add to this mix the exceptionally low interest rates courtesy of the Federal Reserve, and you have a perfect recipe for an asset bubble that will eventually pop.
So far in 2014 auto sales have been strong, reaching over 17 million units on an annualized pace before dropping back a bit in September. These are heady times for auto manufacturers, but based on demographic trends, they should be preparing for leaner sales ahead.