Insurance and Financing in the Auto Industry

Worries about the economy in 2019 are keeping Wall Street traders up at night, and a new report from automotive publisher Edmunds won’t help.

The experts at Edmunds expect new car sales will continue to go down next year after peaking in 2017. Their report forecasts 16.9 million new vehicles will be sold in 2019, compared to an expected 17.2 million vehicles in 2018.

But put in a historical context, next year’s numbers might not be that low. Auto sales have surged in the early part of the decade and are only now tapering off. At the same time, a solid job market and low gas prices could increase consumers’ confidence to buy.

Because there was such a large number of auto leases in 2016, millions of three-year-old vehicles will come off lease in 2019, and chances are those consumers will choose another lease, which could actually boost new car sales.

Impact of expiring leases

"Since we reached 'peak lease' in 2016, more than four million consumers are expected to turn in their vehicles and come back to the market in 2019, which will have a major impact on new vehicle sales," said Jessica Caldwell, executive director of industry analysis for Edmunds.

But there’s a catch, she says. Consumers are returning to a very different automotive market. Prices of new cars have gone up, and so have interest rates. That means leasing a new car in 2019 may be more expensive than it was three years ago. Right now, however, there appear to be plenty of deals.

Wantalease, an online lease marketplace, says it might be more expensive to lease a truck or SUV, but lease prices on some sedans and compacts have gone down in December.

Current lease deals

Right now, the lease payment on the Chevrolet Cruz is down 13.31 percent. You can lease a Ford Focus for 8.44 percent less and a Toyota Corolla for 7.29 percent less.

But some truck leases are even lower. Wantalease reports the lease payment on the Dodge Ram 1500 Crew Cab is just $129 a month. That’s lower than the Volkswagen Jetta, which carries a monthly payment of $139.

That means a savvy car buyer will need to shop carefully in 2019 to select a vehicle which the dealer is highly motivated to sell. Edmunds expects new cars will sell for an average of $3,000 more than in 2018. Because of rising interest rates, financing a new car purchase will cost an average of $1,800 more over the course of a 60-month loan.

More car buyers are making the mistake of stretching out their payments beyond the length that personal finance experts say is prudent.

An analysis by automotive publisher Edmunds.com shows the average auto loan length reached an all-time high of 69.3 months in June — up 6.8 percent from five years ago. For those of you without a calculator within reach, that's five years and nine months.

It's also no surprise that Edmunds found consumers purchasing a car in June took on more debt to do so. The average financed amount hit nearly $31,000, up $631 from the month before. The average monthly payment in June was $517, no doubt why more consumers felt the need to extend the payments.

"Stretching out loan terms to secure a monthly payment they're comfortable with is becoming buyers' go-to way to get the cars they want, equipped the way they want them," said Edmunds Executive Director of Industry Analysis Jessica Caldwell.

Why it's risky

But Cardwell says that's risky, and here's why: it leaves borrowers exposed to owing more for the car than the vehicle is worth. After all, a car starts losing value as soon as you drive it off the lot.

Maybe that's not all that bad if you have no loss of income or other financial setbacks. But it pretty much guarantees you cannot sell the car or trade it in for a while, unless you find a dealer willing to take the loss. These days, that's getting harder to do.

Meanwhile, the interest rate on car loans has come up in the last 12 months. Today, Edmunds says the average is 4.96%, up 5.7% from a year ago and up 13.6% from five years ago.

Consumers are choosing more expensive vehicles

It's not that all car prices are going through the roof. There are plenty of attractive vehicles in the $16,000 to $26,000 price range. Transaction prices have risen primarily because consumers have chosen expensive cars and trucks, loaded with expensive options. That's why many vehicles now cost what a condo did just a few years ago.

Personal finance experts advise that new or used vehicles should not be financed for longer than 60 months. Actually, 48 months -- four years -- is optimum.

Buyers should also put up a healthy down payment. The resulting monthly payment should then fit comfortably into the household budget.

Maybe because of the dip in auto sales, the cost of leasing a new car is going down this month.

A report by Wantalease.com, an online car lease marketplace, finds the average monthly lease payment declined in June, pressured by three cars with payments under $150.

According to the website, the Nissan Sentra SV can be leased for as low as $109 per month. It says 15 vehicles carry a lease payment of $199 per month or less.

The average monthly lease payment so far this month is $340.37, down from $352.80 in May. Wantalease.com says it keeps tabs on the monthly payments on 60 of today’s most popular makes and models.

Small SUVs

Small SUVs are the hottest vehicles in the marketplace at the moment, and three of them are currently available with payments of $199 a month. They are the Chevrolet Equinox 2WD LS, the Honda CR-V LX 2WD, and the Nissan Rogue S FWD.

Among luxury vehicles – traditionally where most vehicles have been leased rather than purchased – the the Acura ILX is currently the lowest-priced vehicle in that category, at $219 per month.

As for the biggest drop in lease payments from one month to the next, the Chevrolet Cab LT drives away with that honor. Its payment fell 16.8% this month, to $289. The Chevy Equinox 2WD dropped nearly as much and can now be leased for $199 a month.

Aggressive pricing

“With monthly vehicle sales struggling a bit to maintain momentum of the last few years, we’re seeing a continuation of aggressive lease pricing on many of today’s more popular cars and trucks,” said Scot Hall, Executive Vice President, Wantalease.com. “Yesterday’s lease deals were largely confined to luxury makes and models, but today we’re seeing low prices on a wider variety of cars and trucks, including utility vehicles.”

But whether a lease makes sense is determined by more factors than simply a monthly payment that fits into your budget. All leases have mileage limits, and going over them will carry additional changes at the end of the lease. If you drive more than 1,000 miles per month, you might consider purchasing a less expensive vehicle.

You may also owe additional money when you turn the car in if has dents and scratches, beyond normal wear and tear.

Coming out of the Great Recession, the auto industry was one of the first areas of the economy to get back on its feet.

While mortgage lenders became a lot more difficult to deal with, there was plenty of credit for car buyers, often with generous terms. Interest rates were rock bottom, and if you had a job, it wasn't hard to qualify for a loan.

As a result, car sales posted records year after year and consumers purchased and leased increasingly expensive vehicles. The average transaction price (ATP) on a new vehicle now fluctuates between $33,000 and $34,000.

To afford the monthly payments on a loan of that size, lenders have increased the lengths of the loans. Five year loans soon because six year loans. Now, a report by Automotive News, based on data from Experian, finds that loan terms of 73 to 84 months -- seven years -- made up nearly a third of new car loans in the fourth quarter of last year.

Industry concern

The automotive industry publication cites that as a concern for the industry, as well as consumers, because consumers are trading in vehicles still owing a lot of money. The average negative equity on a trade in during the first quarter was $5,195, according to Edmunds.com.

At the same time, the record sales of new cars has produced a glut of used cars -- a glut that is making used cars worth less, accelerating the increase in negative equity. It puts consumers who purchased expensive automobiles and financed them for six or seven years in a precarious position.

While a house can be expected to gain value over time, an automobile loses value the minute you drive it off the lot. If you aren't paying down the loan fast enough, you soon find yourself underwater, just like those homeowners who purchased houses with subprime loans more than a decade ago.

Carmakers and dealers have encouraged consumers to purchase more expensive vehicles by extending the time to pay for them.

More bells and whistles

"Buyers want pricier cars with more bells and whistles, leading to the troubling trend of trading longer loan terms for lower monthly payments," said Edmunds' analyst Jessica Caldwell. "But now that interest rates are also on the rise, something has to give."

The takeaway for consumers is to only purchase a vehicle that can be paid for while you're still driving it. If you plan to trade in the car in five years, only finance it for five years. That way, you still have some residual value that can be used for a down payment.

An even better plan is to finance the vehicle for a year less than you plan to drive it. That way you get a year of ownership without a car payment.

Of course, to do that you may need to look at vehicles you can purchase for $18,000 instead of $34,000 -- vehicles without so many bells and whistles.

Whether you buy a new or used car, the cost of getting it off the lot is not the only part of the price you need to consider. There are maintenance and fuel costs – and insurance.

Some cars get better fuel economy than others. That information is on a window sticker so it's easy to see. Less obvious are maintenance costs, but some makes and models have better reputations than others when it comes to staying out of the repair shop.

All cars must be insured and insurance underwriters have their own way of measuring the risk one vehicle carries over another. What you pay for the car isn't nearly the factor you might expect.

Wide variance in premiums

A study by personal finance website WalletHubfound that insurance premiums for cars in the same price range can differ by as much as 39%, with the gap increasing as vehicles get more expensive.

The premiums you pay for your car insurance are driven by a number of factors. They include your driving record and experience, where you live, what kind of other drivers live around you, and what you are driving.

For its study WalletHub said it reviewed premium data from the top 5 auto insurance companies in the U.S. – State Farm Auto, Geico, Allstate Corp. (Esurance for New York), Progressive and Liberty Mutual Group.

It then analyzed the insurance premiums for the three largest states — California, Texas and New York, zeroing in on urban neighborhoods.

Small part of premium tied to cost of car

It concludes that a correlation between the price of a car and the cost of insurance can't be assumed. When the cost of an insurance premium went up, only 22% of that increase could be tied to the price of the car.

The remaining 78% was influenced by body type, age and make of the vehicle. Key findings in the report include the fact that consumers who purchase a new sedan will pay almost $150 less to insure their car than if they bought a 3-year old sedan in the same price range. New cars can be cheaper to insure than even fairly recent models because of improvements in safety features.

Sports cars are the most expensive body style to insure – no surprise there. Their premiums run 24% more than crossovers and SUVs, which cost the least to insure.

Camry vs. Accord

When comparing the annual insurance premiums of some top-selling cars, the study found a 2015 Toyota Camry L cost $2,787 a year to ensure while the Honda Accord LX cost $2,550 for identical coverage.

The Toyota Corolla L, which costs $6,000 less than the Camry, costs about the same to insure.

Whether you are buying a new or used car, it's always a good idea to check with you auto insurance company about what it will cost to insure it before you take it for a test drive.

The Mercedes E-Class sedan is the safest car on the highway, while the least safe is the two-door Chevrolet Blazer, according to a study by the Insurance Institute for Highway Safety (IIHS).

The institute reached its conclusions about the Mercedes, Blazer and 197 other relatively popular vehicles by studying driver death rates of 1999 to 2002 model cars and trucks from 2000 to 2003.

Among four-door midsize cars, the Volkswagen Passat performed best, with an average of 16 driver deaths per million registered vehicles annually, but the Chrysler Sebring had 126 driver deaths.

Among midsize sport utility vehicles with four-wheel drive, the Toyota 4Runner had 12 deaths per million registered vehicles annually, compared with 134 for the two-door Ford Explorer.

The study focused on the rate of driver deaths in various types of crashes, including both single- and multiple-vehicle accidents.

The overall driver death rate, for 199 models studied during the 2000-2003 calendar years, was 87 per million registered vehicles annually, the institute said. The Blazer had an average of 308 driver deaths per million. It also had the highest rate of driver deaths in rollover accidents at 251 per million.

"Large cars and minivans dominate among vehicle models with very low death rates" while those with the highest fatality rates are "mostly small cars and small and midsize SUVs," the study said

The Results

Lowest Rates of Driver Death
Fewer than 30 driver deaths per million registered vehicle years (1999-2002 models during calendar years 2000-03)

Highest Rates of Driver Death
More than 160 driver deaths per million registered vehicle years (1999-2002 models during calendar years 2000-03)

Enterprise Rent-A-Car will pay $2 million in restitution to tens of thousands of consumers who purchased unnecessary liability insurance.

Enterprise consented to a court order resolving three years of litigation in a lawsuit bought by New York Attorney General Eliot Spitzer. During the case, the courts confirmed Spitzer's contention that Enterprise has an obligation to provide minimum liability coverage to its renters and to defend them when they are sued by third parties.

"This litigation resulted in a significant change in the practices of this rental car company that benefits consumers," Spitzer said. "The court order compensates consumers who were deceived into purchasing liability insurance through Enterprise even after the states highest court held that rental car companies are required by law to provide coverage for their renters."

In May 2000, the Attorney General sued Enterprise, alleging that it was failing to provide its renters with the minimum liability coverage required by state law. The minimum amount of personal liability coverage is $25,000 - $50,000 for bodily injury, $50,000 - $100,000 for death, plus $10,000 for property damage. Instead of providing the insurance mandated by law, Enterprise would sue its renters to recover any liability incurred by Enterprise while the renter was driving it.

In addition to not providing insurance, Enterprise profited from the sale of supplemental insurance. By telling its customers that it provided no insurance, according to the lawsuit, Enterprise induced consumers into purchasing liability insurance, known as Supplemental Liability Protection, or SLP, at an extra cost of $6.95 to $7.95 per day of rental. The supplemental liability insurance provides consumers with $1 million in coverage.

In fact, most customers are covered by their own auto insurance policies and do not need the supplemental coverage.

Under the terms of the consent order, each of the more than 105,000 consumers who purchased SLP from Enterprise in New York between April and August 2001 will receive a check from Enterprise within approximately 60 days. The checks will range from a minimum of $5 for someone who purchased SLP for only one day, to a hundred dollars or more for consumers who purchased more than 40 days worth of SLP during the five month period.

In addition, Enterprise will pay $200,000 in costs to the state.