Americans Wading Deeper into Auto Loan Debt as Car Price Rise
Nearly a third of all U.S. consumers trading in a vehicle during the first quarter were underwater — owed more than the car is worth — on their trades, the highest level in five years.
According to data from Edmunds.com, 30.9 percent of the cars, crossovers, and pickups traded in on a new vehicle in Q1 carried negative equity and the number is growing. With new vehicle prices rising and interest rates still higher than consumers are used to, buyers are shopping a monthly payment rather than the price of a new vehicle.
The average amount owed on a trade in Q1 was $7,183, which is the second-highest number on record. It’s also 42% more than the same period five years ago, Edmunds noted. Rolling over that kind of money adds nearly $150 to a monthly payment so those underwater buyers’ average monthly payment is now $932.
In an attempt to manage their negative equity, buyers with good enough credit are expanding their loan terms to push the monthly payment down. Edmunds notes that during the first quarter that more than nine out of 10 buyers with negative equity trades had loans of at least 72 months or longer. Just under half of those — 43 percent — stretched that out to 84 months.
“The average term on these loans with rollover debt was 77.4 months, compared with 70.3 months for all new-vehicle loans,” the company noted. “At the same time, the average APR for these underwater borrowers was 7.9 percent in Q1, compared with 6.9 percent for the market at large. These longer and more expensive loan terms can help keep monthly payments within reach, but they also stretch out the time it takes for consumers to build equity in their vehicles.”
In the first quarter, the average underwater buyer financed $55,970, which is $12,071 more than a new vehicle buyer — and likely at a much higher interest rate. Being underwater begins an unpleasant cycle, Edmunds noted. The rollover balances raise the monthly payment, forcing buyers into a longer loan term, putting the next vehicle even further underwater.
Negative equity doesn’t just reflect past purchasing decisions; it also shapes the next one, Edmunds noted. Eventually, the ability to keep rolling over negative equity stops, which means buyers are limited — or eliminated — from buying a vehicle they want in the future. “For some shoppers, replacing a vehicle becomes less about timing or preference and more about what is financially feasible within the remaining loan balance,” Edmunds said.
[Images: Toyota, Jeep, Volkswagen]
Become a TTAC insider. Get the latest news, features, TTAC takes, and everything else that gets to the truth about cars first by subscribing to our newsletter.
Michael Strong has spent more than 25 years writing about the automotive industry. A Detroit-area native, he’s written about everything from local car shows to product reviews to financial news. Currently he writes and edits for a variety of national and local publications. He’s also a longtime member of the Automotive Press Association and the International Motor Press Association, and a graduate of Georgia Southern University. Hail Southern! Despite a love for ’70s land yachts and BMWs from the late ’80s and early ’90s, his personal vehicle is neither of those.
More by Michael Strong
Comments
Join the conversation
Ok, since we are doing parenting stories (or I am)...
My first child, a masculine child, I went halves with him on a basic mower and a string trimmer and he had some business cards printed up and was going to be a lawn mowing mogul, but it never really went anywhere.
I remember the first time he invested some money and was looking at the statement where it had appreciated and he told me the number and I said, "Easier than mowing lawns, isn't it?" and then the light bulb switched on. 😀
Realize that some of the folks bought Detroit or Korean shite that turned into nightmares and will roll the outstanding balance in another loan just to get rid of these POS vehicles. 🚗🚗🚗