Why having a car with negative equity can be a problem So, we're still early on in the cycle."Īlso see: Ever-higher interest rates are squeezing subprime buyers out of the car market "For that matter, they actually stabilized and recently increased slightly. "I think we're in the early cusp of it, because really used car prices started dropping at the end of last year," he says. Kleczynski believes negative equity will likely become a bigger issue. In April 2023, average APRs were at 7% for new cars and 11.1% for used, according to Edmunds. When the Federal Reserve began increasing the federal funds rate in early 2022, auto loan rates followed, reaching a 15-year high. On top of higher loan amounts, car buyers who financed in the past year committed to paying more in interest. And now, as vehicle values are starting to decrease, it's starting to catch up with them," says Chris Kleczynski, PenFed Credit Union assistant vice president and head of product for automotive lending. "All the stars aligned to create this scenario where people were able to spend more and probably get higher loans. In April 2023, the average used-car listing price was nearly $27,000, an increase of 35% since 2019.Īt the same time, government stimulus payments and less consumer spending enabled some people to improve their financial situations. That's compared with $38,948 in December 2019, before the pandemic hit in the U.S. As recently as December 2022, the average transaction price for a new car peaked at $49,507, according to data company Cox Automotive. Lack of supply for new and used cars pushed vehicle prices to record highs. However, many people in the automotive and finance industry worry a perfect "negative equity" storm is brewing as a result of pandemic-related factors.ĭuring COVID-19, microchip shortages and supply chain issues caused new-car inventory to plummet, forcing many car buyers to purchase used vehicles. Negative equity, also called being underwater or upside-down, isn't new, as cars have always depreciated. Why is the amount of negative equity growing? Related:More drivers under 30 are falling behind on car payments, Fed says According to automotive research firm Edmunds, the average negative equity value of auto trade-ins was $5,445 in April 2023, up nearly 24% compared with the previous year. Many car owners who bought during the pandemic are finding themselves with growing negative equity. "I was looking at the paperwork like, 'I know that's not what this says.'" "I was very clear that I didn't want a mortgage payment for a car payment," says Scott. That would mean she'd continue to pay a $400 monthly car payment and add to it a $1,300 payment for the new car - bringing her total to $1,700 a month. Alternatively, the salesperson said she could keep her current car and get a new $62,000 loan for a 2023 Infiniti QX60. Scott says the dealership wouldn't take her car as a trade-in unless she paid the negative equity. Scott visited a dealership wanting to trade in the now-refinanced car and encountered obstacles because of negative equity, or owing more on her loan than the car was worth. But the single, working mother of four couldn't delay the purchase because her old car had stopped running.įast-forward to March 2023, when used-car prices had declined from record highs. When Atlanta resident Morgan Nichole Scott financed a used Infiniti QX60 in late summer 2020, car prices were starting to skyrocket. This article is reprinted by permission from NerdWallet. Keeping an under-water car might be your best bet
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