F&I Millennials are more bullish on auto loans than Gen Xers were

Millennials are opening auto loans at a 21 percent higher rate than Gen X consumers did at the same age. But millennials are finding alternatives to other types of finance products, such as credit cards, according to a study by credit bureau TransUnion.

The auto loan and lease origination rate for Gen Xers when they were 21 to 34 years old was 12.09 percent, compared with 14.58 percent for millennials. That puts millennials ahead by 21 percent, TransUnion said. Millennials’ personal loan originations are 98 percent higher than Gen Xers’ at the same age, while their credit card and mortgage originations are lower — by 22 percent and 47 percent.

The study compared millennial consumers, born from 1980 to 1994, and Gen X consumers, born 1965 to 1979, because they represent more than half of the overall buying power in the U.S., TransUnion said in a statement. “Younger borrowers offer lenders more growth opportunities in the future, as the largest volume of loan originations occur the decade after consumers turn 40 years of age — a time when many consumers are near their peak earnings,” said Ezra Becker, head of TransUnion’s global research and consulting group.

For both generations, the study examined origination trends during a year when they were between 21 and 34 years old. For millennials the chosen year was 2015 and for Gen Xers it was 2001.

“Our study clearly shows that Millennials exhibit different preferences for credit products than Gen X’ers did at the same age,” Nidhi Verma, co-author of the study and vice president in TransUnion’s innovative solutions group, said in the statement. “While credit cards are not as popular with Millennials as they were with previous generations, purchasing or leasing an auto is clearly important to them. Digitalization allows consumers of all ages to more easily ‘shop around’ for vehicles, making the process less onerous. This is the market Millennials have grown up in, and the one in which they most naturally operate. In particular, the influx of [financial technology companies] into the personal loan space appears to have resonated as an attractive lending channel for Millennials growing up in the digital age.”

‘A demand issue’

While millennials’ auto origination rate is higher than Gen Xers’, their participation rate — the percentage of the population that has a loan or lease — is 5 percent lower, TransUnion said.

But when you look at superprime consumers, “the 5 percent gap disappears,” Becker told Automotive News. Superprime consumers have credit access regardless of the time period, so “it’s not a supply issue,” he said. “It’s a demand issue.”

With respect to the younger generation, “in many ways, their demand curve is delayed,” Becker said. “They’re buying homes later, they’re getting married later, they’re starting families later. In a similar manner, they seem to be delaying some of those [auto] purchases.”

Consumers have more options than just a credit card, which is likely why millennials have two fewer credit and private-label cards than Gen Xers at the same age. Instead, possibly driven by financial technology options, millennials are opening more personal loans, Becker said. They also have fewer mortgages because of tightening underwriting criteria, he said.

Auto financing, on the other hand, faces rising demand. “Through the various studies we’ve done, auto lending seems to be this wonder child,” Becker said. “Even though [demand has] been tapering off lately, consumers tend to pay their auto loans pretty high up in the payment hierarchy. I don’t see the relative primacy of auto loans going away any time soon.”

Young consumers still need to get to work, he said. “The alternative to owning a car is public transportation. Unless you live in Manhattan or downtown Chicago, public transportation can be very ineffective.”

The need for a car has remained consistent, and with loan terms lengthening, many consumers can make an auto loan fit into their budgets, he said. Add to that the fact that millennials have the ability to shop online and compare cars. “There are so many websites that allow you to find the perfect car for you at right price point than ever existed 15, 20 years ago. That has made the shopping experience [appealing] for millennials.”

Gen Z similar

Gen Z, the generation younger than millennials, was not part of the study, but Becker predicts the group’s borrowing behavior will resemble that of millennials. “They are immersed in the digital economy. Younger consumers engage with each other with forms of social media. That is as natural to them as being on the phone all evening was to [Gen X]. In-person vs. digital communication balances have changed. How they want to be engaged by lenders and who they even consider a lender, I think, is going to challenge conventional norms.”

You can reach Hannah Lutz at hlutz@crain.com