Theres been a big increase in consumers who owe more than the vehicle is worth
of ConsumerAffairs
Financing your vehicle for six years with little down may be a bad idea. With a 72-month loan, your vehicle may depreciate faster than you pay down the loan.
Thats apparently happening to millions of consumers. Automotive website Edmunds reports an increasing number of car owners owe more on their vehicle than its worth. With a small down payment and a lengthy loan term, more of your payment goes to interest, not paying off the loan.
Edmunds reports that in the third quarter, 24.2% of trade-ins toward new vehicle purchases had negative equity, up from 23.9% in the second quarter and 18.5% in the third quarter of 2023. And consumers who are underwater on their car loans owe more money than ever before.
Among people who are underwater on their auto loan, the average amount owed reached an all-time high of $6,458, compared to $6,255 in the second quarter and $5,808 in the third quarter of 2023.
Some people are $10,000 in the hole
But thats just the average. Edmunds found that 22% of vehicle owners with negative equity owed $10,000 or more on their car loans, and 7.5% of vehicle owners with negative equity owed $15,000-plus more. That means they cant sell their vehicles without coming up with that much cash to pay the lender. And it goes without saying, the vehicle has no trade-in value.
"Consumers owing a grand or two more than their cars are worth isn't the end of the world, but seeing such a notable share of individuals affected at the $10,000 or even $15,000 level is nothing short of alarming, said Jessica Caldwell, Edmunds' head of Insights.
Caldwell says uncontrollable market factors are contributing to the imbalance, but she also says consumers misguided financial decisions may also play a role.
"On the market factor side, many consumers who purchased new vehicles during the inventory crunch of 2021-2022 paid over MSRP, so they didn't chip away at the principle of their loans in a traditional manner, she said. On top of that, trade-in values for near-new vehicles are taking a hit as automakers reintroduce incentives.
Buying more car than they can afford
With the high price of cars and trucks and high interest rates, many consumers are opting for longer payment terms to reduce the amount of the payment, which is a way of saying theyre buying vehicles they cant afford.
They're also trading in their vehicles earlier than is financially prudent," Caldwell added.
If this sounds vaguely familiar, the same situation occurred in the housing market just before the housing market crashed in 2008. People bought homes with little to no money down. Millions bought with subprime loans and quickly fell into foreclosure.
With millions of home foreclosures, property values crashed, leaving those who borrowed 110% of the homes value with no money down underwater for years. So far, subprime loans dont appear to be a major factor in the automotive market, at least not yet.
But just like the early 2000s housing market, stretching a car loan out for six or seven years may allow you to buy a vehicle you really cant afford. Personal finance experts generally agree that a new vehicle should be financed for no more than five years while a used car should be financed for no more than three years.
Photo Credit: Consumer Affairs News Department Images
Posted: 2024-10-16 00:22:22
