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During the peak of the COVID supply shortage, dealers greedily raked in money hand over fist as customers who needed cars were faced with two choices: overpay or live without transportation. Now, many of those customers are looking to trade in their COVID-era purchases on something new, and finance departments are fighting uphill battles trying to get them approved for credit because nearly a third of them are now completely underwater on their existing loans.
Edmunds sounded the alarm earlier this year after the number of underwater customers being denied new loans began to spike. Back in March, we saw a report that more than 25% of buyers carried negative equity from a previous loan. As of Q2, that number had reached 30%, Automotive News reports, and has held steady since.
And the problem is self-perpetuating. Rolling negative equity into a new purchase means customers are effectively paying off two cars at the same time, while only enjoying the benefit of the most recent one they purchased. That deficit is then more likely to be carried over into further purchases down the line. A driver carrying negative equity has an average monthly payment of $944 per month—$167 more than the average buyer without one. Yes, the average new-car payment in America is now $777 per month.
That $944 figure assumes, of course, that the buyer can get financing at all, which AN says is becoming a more commonplace issue. Dealers are complaining that their finance departments are having to spend more time on each transaction simply because it’s harder to finance loans when the buyer is carrying negative equity, and tracking down a lender who will play ball makes the process slower for everybody involved—including other customers still sitting in the showroom.
What’s perhaps even more concerning than the raw figures (and their knock-on effects) is the fact that this latest round of negative-equity buyers doesn’t match the traditional variety. Typically, this pattern is most common with buyers who over-extend themselves to purchase a rapidly depreciating luxury vehicle.
This time around, however, it’s afflicting people who made far more responsible choices, including buyers of the Toyota Tundra, Ford F-150, Jeep Wrangler and Honda CR-V—all known to hold their value far better than the average model. The choice of vehicle wasn’t the problem, as an analyst put it; it was the financing terms that should take the lion’s share of the blame. Higher sticker prices, dealer markups, and more expensive credit all conspired to push loan numbers up—and get buyers into trouble.
A lot of trouble, potentially. Edmunds is now saying that the average buyer who was underwater on their trade-in was carrying nearly $7,000 in negative equity at the time of purchase. Over the course of a loan, they paid nearly $6,500 more than the average buyer in interest alone. That’s 60% more than the average buyer, all for the pleasure of doing it again in three years. Yikes.
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Byron is an editor at The Drive with a keen eye for infrastructure, sales and regulatory stories.
