Negative equity car loans continue to weigh on U.S. vehicle buyers, with 30% of trade-ins carrying more debt than the vehicles are worth during the second quarter, according to Automotive News. The trend reflects growing financial pressure on customers who purchased vehicles during the COVID-era supply shortage and are now seeking to trade them in.
More Trade-In Buyers Are Underwater on Their Loans
During the COVID supply shortage, many buyers paid elevated prices for new vehicles as limited inventory left them with few alternatives. Those customers are now returning to dealerships looking for new vehicles, but many are encountering financing challenges because they owe more on their existing loans than their vehicles are worth.
Earlier this year, Edmunds reported a sharp increase in loan denials involving buyers with negative equity. In March, more than 25% of buyers carried negative equity from a previous loan. By the second quarter, that figure had climbed to 30% and remained at that level, according to Automotive News.
Rolling Debt Into New Loans Increases Costs
Negative equity often carries over into the next vehicle purchase, leaving buyers paying for two vehicles at once while driving only the newest one. This cycle can continue with future purchases, making it more difficult for borrowers to reduce their outstanding debt.
Drivers with negative equity now average monthly vehicle payments of $944, which is $167 higher than the $777 average monthly payment for buyers without negative equity.
Dealerships Face More Financing Challenges
According to Automotive News, obtaining financing for buyers with negative equity has become increasingly difficult.
Dealers report that finance departments are spending more time on individual transactions because finding lenders willing to approve these loans has become more challenging. The additional work also slows the purchasing process for other customers waiting in dealership showrooms.
Higher Prices and Financing Costs Affect Mainstream Buyers
The latest wave of negative equity is affecting a different group of buyers than in previous years.
Rather than primarily involving buyers of rapidly depreciating luxury vehicles, the trend now includes owners of models known for retaining value, including the Toyota Tundra, Ford F-150, Jeep Wrangler, and Honda CR-V.
An analyst cited in the report said the issue was not the choice of vehicle but the financing terms. Higher vehicle prices, dealer markups, and increased borrowing costs all contributed to larger loan balances.
Average Negative Equity Nears $7,000
Edmunds said the average buyer who traded in a vehicle while underwater carried nearly $7,000 in negative equity at the time of purchase.
Over the life of the loan, those buyers paid nearly $6,500 more in interest than the average buyer, representing about 60% more in interest costs.
The latest figures highlight the continued financial impact of elevated vehicle prices and financing costs on buyers attempting to replace vehicles purchased during the COVID-era supply shortage.
