Vehicle Purchases and Loans

Delivered May 25th, 2019. Contributors: Hanine K., Sweta S., Joshua M. and

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Customer Car Purchasing Journey

In 2016, the Americans auto loan market size was $564.6 billion. With no signs of slowing, the auto loan industry jumped to $568.6 billion by the end of 2017. Therefore, family income plays a major role in deciding to apply for car loans. About 44.6% of families with lower income (less than $40,000) don't apply for car loans to finance their vehicle purchase. 
Customer Car Purchasing Journey: Overview"In the United States, vehicle sales are slowing down. Consumers are holding onto their cars for longer and buying less often—an average of 6.5 years today compared to 4.3 years just a decade ago."

According to research from Google, the most important phases in the customer car purchasing journey are:
 “Which-car-is-best-for-me”: At the beginning, they ask family members and friends for advice and look into "trusted automotive industry portals for vehicle information."
 “Is-it-right-for-me”: Then, they "read information on car company websites, check out video clips that demo vehicle features and options, and watch online test drive videos."
 “Can-I-afford it”: They look for price comparison and financing options in order to find the trade-in value of their owned car.
“Where-should-I buy it.” According to Google, shoppers prefer dealerships that are near their location trying to find the dealership which will deliver the best experience.
“Am-I-getting-a-deal”: After deciding what to buy, they will visit one to two dealerships to complete the purchase. Also, "they’re using their smartphones to confirm if they’re getting the best price."
Car LoansIn 2016, the Americans auto loan market size was $564.6 billion. With no signs of slowing, the auto loan industry jumped to $568.6 billion by the end of 2017.

About 73% of consumers in the United States get car loans at the dealership while only 5% of them apply for car loans online in 2018. Therefore, it is estimated that 29% of consumers are planning to get their car loans online in the next years. In 2019, online car purchase financing increased by 8% to reach 13% of the car loans industry while 63% of the consumers get their car loans at the dealership.

Approximately two-thirds of the consumers in the United States took out a car loan to finance new or used cars' purchase. Half of these car loans were taken out from directly the dealership/purchase location while about 47% were taken from a credit union, a bank, or an internet lender. 

Family income plays a major role in deciding to apply for car loans. About 44.6% of families with lower income (less than $40,000) don't apply for car loans to finance their vehicle purchase. On the other side, lower-income families who apply for car loans prefer taking it from a credit union, a bank, or an internet lender (28.5%). 

Additionally, families with $40,000-$100,000 income are getting loans directly from the dealership:
Don't apply for loans: 28.9% 
At the dealership: 36.2% 
A credit union, a bank, or an internet lender: 33% 

Further, higher-income families (more than $100,000) are also getting loans directly at the dealership/seller:
Don't apply for loans: 28.1% 
At the dealership: 39.4% 
A credit union, a bank, or an internet lender: 31.1%

"Mobile app is biggest driver of satisfaction when customers experience all five aspects of the auto loan process: Overall, 23% of auto loan customers indicate completing a loan application digitally (website or mobile app)." About 47% of car loans' customers shopped online prior to a dealership visit. Within these customers, 42% prefer choosing an indirect financing option (through their dealer) and 12% prefer direct financing offered by a financial institution. 
Customers Mindset and Behaviors"The automotive consumer journey is one of the most complex of all industries. Although customers still purchase their vehicles at dealerships, most of the decision-making and influential moments happen beforehand online." Customers are purchasing from dealerships "where they have previous experience" with fewer visits to multiple dealerships. In addition, 51% of customers looking for a new car in the United States are women.

When researching, video research is the most effective and popular type of research. Customers are looking for features, test drives, and car options on YouTube. Therefore, 70% of customers who used video search before their car purchase were influenced by video content.

Also, they don't focus only on auto brands websites, but they check comparison websites for reviews and price comparison. Thus, 56% of new purchases "start at a third-party site and end up at a dealer website."

More than 50% of car buyers use a mobile device in their car purchasing journey. According to research conducted by Weve Automotive, the mobile journey starts with:
Awareness: 57% start with a mobile search for car inspiration.
Consideration: 59% look for compared prices/specifications comparison on mobile device.
Intent: 61% search for nearby dealerships on mobile.
Purchase: 9% purchase a new car on a mobile device.
Loyalty: "9% explored aftersales on their mobile."
Car Purchasing BarriersThe main barrier that most buyers are facing is price. In the second place, comes reliability as customers want their vehicle to serve them for several years without troubles.

Male customers worry more about performance while about only 40% of female customers worry about their new or used car's engine performance. Also, "fuel consumption is becoming increasingly important, and stands in third place when looking at the main concerns of buyers."
Car Purchase TriggersShoppers’ purchase triggers affect the car purchasing journey and process. The main triggers are life stage change (new job, move to suburbs, new baby, kids going to college), car milestone (upcoming maintenance, out of warranty, lease over), out one car (there is an accident, car breaks), routine upgrade (for example buy next car every 2-3 years), and pure desire (no reasons, they just want a new car). 

Purchase trigger by income:
Current vehicle milestone will occur: About 31% of customers earning more than $75,000 purchase because of a routine upgrade, and about 28% purchase because of a vehicle milestone. Meanwhile, only 18% of customers earning less than $75,000 purchase because of a vehicle milestone. Customers earning less than $75,000 are "more likely to purchase due to a life change" (19%) or being “out” a vehicle (24%).

Purchase trigger by age group:
18-34: Purchase due to a life stage change (30%) or being out a vehicle (23%).
35-54: Purchase due to current vehicle milestone (25%) or routine upgrade (20%).
55 and more: Purchase due to current vehicle milestone (26%) or routine upgrade (27%).


Lastly, approximately half of car loans were taken out from directly the dealership/purchase location while about 47% were taken from a credit union, a bank, or an internet lender. 

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New and Used Car Buying Process

According to our research through various credible sources, the process of buying a new and used car in America is very similar. Spring and fall season in America is the peak season due to the introduction of new car models for the sales of both new and used cars. However, from December to February, car sales drop due to cold weather and Christmas time.

New and Used Car Buying ProcessIn America, the demand for cars increases during the spring and fall which are known as the peak season from the end of February to the end of May and from September to the end of November. This is the time when new car models are introduced and which is the reason for the rise increased car sales during this period. However, from December to February, car sales fall. This is due to cold weather in these months and also, as in December, people start to spend for Christmas. For both, the new and used cars, the sales tend to peak in the same months in America. People can get a car loan easily in America if they do not have any collateral. 

It was found that the average time people spend buying new cars in America is 12 hours and 31 minutes. For used cars, the average time that people spend on buying is about 15 hours and 20 minutes. A car loan can be obtained in America through an online application. In cases, when a car loan is being processed through the dealership where people have taken a test drive, they can negotiate the terms of the loan such as price and term. After that, the customer can sign the papers and get the loan processed after he leaves. Americans spend 26% of their time buying a new car at the dealership; however, they spend 20% of their time buying a used car at the dealership.

Usually, car loans have lower interest rates and lower repayments than a personal loan. It can even be obtained by customers with a bad credit score and are more convenient to get than a personal loan. Car loans from the bank are usually arranged before going to the car dealership and buying the car. These loans are considered to be pre-approved from the bank and are desirable because they simplify the negotiation process. However, the dealership loans are arranged at the dealership at the time of buying the car. Dealership arranged car loans are desirable because they give the opportunity to negotiate things like the interest rate. Based on Autonews, in 2018 63% of Americans used dealership arranged car loans; however, 28% said they would apply online next time. 32% of the customers said they would go to the bank or another institution next time they buy a car.

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Vehicle Loan Process Journey

The vehicle loan process entails understanding the requisite financial terms, getting preapproval for a loan, shopping through dealerships, and finally closing the deal. Below, we will discuss these items in more depth.
Understanding the Financial TermsThe first step in the vehicle loan process journey is to understand the financial aspects and terms. Vehicles are a major investment, thus finances are often discussed throughout the process. Some terms and concepts that come up include auto loan, interest rate (finance charge), auto loan term, principal, down payment and monthly payment.

Another major financial criterion is your credit score. Applicants must understand credit scores in general and how it may affect their loan journey. Once credit scores are understood, applicants must understand where to find affordable financing deals as vehicles are expensive. Some potential sources include vehicle companies (captive finance companies), large national banks, small community banks, credit unions, finance companies, and online-only banks.

Consumers may apply for a loan before visiting the dealership. Consumers may also send their information to many different lenders so they have a choice as well as fallbacks. Consumers must choose between using a loan they applied for or the financing solution offered by the dealership. Paying for a vehicle involves considering the total cost of the vehicle plus interest. Finally, once a financing plan has been hashed out, the required paperwork must be signed by both parties.

Bank auto loans are generally cited in the literature as the best option since the customer can shop for the best terms, and in particular, the lowest interest rate. Dealerships are sometimes able to get better rates because they submit applications to several lenders with whom they often have arrangements for discounted rates. Other factors, such as dealership financing arrangements often requiring a down payment or the time it takes to prequalify for a bank auto loan, may also influence customers’ decisions. 

Length of the Loan processThe car loan application process depends on the size of the loan, the person's credit score, and the specific lender. Generally, applications take ten to fifteen minutes to complete. Some lenders offer instant preapproval while those that do not may take several business days to approve an application.

The time for a full approval varies. The funds approved by a full approval may take one to three business days depending on the lender. Online lenders can process and respond within the same day for approval, but funds would still take one to three business days to transfer. Banks and credit unions vary on the order of days for approval times while dealerships may offer financing as quick as the same day.

Some common approval times include:
1. LightStream: Same day
2. Bank of America: 60 seconds
3. USAA: Same day
4. Chase: Three hours to three business days
5. Navy Federal Credit Union: Five minutes
Consumer MotivationAbout 91% of American consumers would accept (or at least consider) an instant vehicle loan offer to avoid dealing with a bank or completing extra paperwork. About 42% of consumers had a wait time of less than 30 minutes to finalize their loans, but 58% waited over 30 minutes. About 89% of consumers believed they received a good or excellent deal on their loan. 

Modern consumers often use online methods to secure their loans. The stated reasons are online is convenient, allows easy comparison across lenders, and is fast. Consumers who valued using dealerships enjoy its one-stop shopping, promotion and discounts, and the potential for better deals. Dealership financing is the most preferred method across all age groups and regions. Consumer who prefer bank financing prefer it because they trust and like their bank, believe they get the best rate at their bank, and have more negotiating power.
Methods, channels, and Resources usedAbout 13% of American consumers received their vehicle loan online which is up from 5% in 2018. About 28% of consumers list online loans as their preferred method. Dealership loans are still the most popular channel at 63% in the United States, which is above the global average of 56%. Only 40% of consumers said dealership financing would be their top choice for their next loan. Banks were used for 18% of loans, but 32% of consumers listed banks as their top choice for a future automotive loan. 

Vehicle shoppers often look online for financing options before visiting a dealership. About 47% of customers shopped online before visiting a dealership. 42% of that 47% selected the financing option offered by their dealer while 12% selected financing through a financial institution.

J.D. Power’s “2018 U.S. Consumer Financing Satisfaction Study” found that highest levels of customer satisfaction are linked to the auto lender offering a “well-designed” mobile app. Positive differences were found across age groups, with the youngest using apps more frequently and the oldest expressing greater levels of satisfaction with lenders. 