February 6, 2017
www.usedcarnews.com
Used Cars Draw Traditional New Car Buyers
Photo by Ted Craig SPREADING THE WORD: Erik Hjermstad of Experian explains the current auto finance market to attendees of this year’s National Automobile Dealers Association Convention. Experian finds that more than half of the used cars financed are purchased by prime buyers. By Ted Craig
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NEW ORLEANS – Attendees at the National Automobile Dealers Association Convention consider themselves new-car dealers, but more and more used cars drive their profits and bring consumers to their stores. Several speakers at events around this year’s NADA convention made that point. Used cars provide a margin of 2:1 for franchise dealers, compared with new cars, said Erin Kerrigan, managing director of Kerrigan Advisors. That difference should remain strong even if used cars feel
more pressure. “Even if we see some margin compression on used cars, there’s a lot more margin there,” Kerrigan said. Fixed operations are the only part of a franchise dealer’s business to outperform used cars and even there used cars provide more of a boost as certified pre-owned sales continue to grow. They reached a record of 2.64 million in 2016. Demand for used cars is growing, even among traditional new-car buyers. “We’re increasingly seeing prime buyers buy used cars,” said Melinda Zabritiski, senior director of Ex-
perian Automotive. The average credit score for a used-car buyer rose to 677 in 2016 from 668 in 2015, she said. This allows creditors to keep monthly payments lower by lengthening the finance terms without adding risk. Part of the reason more consumers are looking at used is that new cars continue to rise in price while wages remain stagnant. Mark Scarpelli, chairman of the National Automobile Dealers Association, said ever-growing mandates for fuel efficiency and safety technology drive these price increases. The downside of this move to used by consumers is that while
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dealers can compensate by selling more used vehicles, manufacturers depend entirely on selling new cars. They might increase incentives to re-capture some of these sales, said Jonathan Banks, J.D. Power’s vice president of vehicle analysis and analytics. Incentives already reached an average of $4,001 per unit, or 10.6 percent of MSRP, in 2016. This risks creating a vicious circle where incentives drive down both new and used prices, making used even more attractive, and manufacturers spend even more to maintain share. “It’s a bit of a frightening situation,” Banks said.