Consumers rolling vehicles into new purchases while owing more than the car is worth are surging, as negative equity car trade-ins reach their highest level in four years and overall auto debt risks rise.
According to Edmunds, 28.1% of vehicles traded in for a new car purchase in the third quarter were in negative equity, meaning the auto loan balance exceeded the vehicle’s value. This was the highest share in four years.
Edmunds found that the average remaining loan balance on these negative equity vehicles in the third quarter was $6,905, more than a 65% jump from about $4,200 in the same period in 2021. Among these owners, about one in three carried more than $5,000 in unpaid debt, and roughly one in four owed over $10,000 when they switched into another vehicle. The average age of these “underwater” cars was 3.7 years.
Negative equity vehicles do not necessarily pose an immediate problem if the owner keeps the car and continues making payments. The loss becomes real when the vehicle is traded in or sold.
Ivan Drury, insights director at Edmunds, said this pattern shows that “consumers are trying to move into a new car without giving themselves enough time to pay down what they already owe,” noting that a strong desire for the latest model is worsening their debt burden.
The current auto loan environment makes the situation more dangerous for borrowers. Data from the Federal Reserve Bank of St. Louis shows that, as of August, the average interest rate on a 60-month new-car loan was 7.6%, sharply higher than about 4.6% four years earlier. At the same time, used car prices have fallen roughly 15% compared with early 2022, which means many vehicles are worth less even as loan balances remain high.
Ivan Drury noted that many of these losses could have been avoided if borrowers had waited another one to two years before trading in. Most auto loans are interest-heavy in the early years, so it takes time before payments begin to build positive equity in the vehicle.
Buyers who trade in negative equity car trade-ins and roll their unpaid balances into a new loan are taking on much larger debts than the average customer. Their average monthly payment was $907, compared with about $767 for all borrowers, and their total loan amount was $11,164 higher than the overall average.
Edmunds reported that consumers with negative equity tend to choose more expensive vehicles, which magnifies the problem. For example, if a buyer has $10,000 in negative equity and selects a vehicle priced at $25,000, the new loan becomes $35,000, about 40% above the car’s value. If that same buyer opts for a $50,000 vehicle, the loan rises to $60,000, or roughly 120% of the car’s value, which can make loan approval more likely but leaves the borrower far deeper in debt.
Experts say that once a borrower realizes their car is worth less than the remaining loan balance, there are only a few ways to reduce long-term losses. They recommend increasing monthly payments to pay down principal faster, considering refinancing if possible, or simply keeping the vehicle longer to allow the loan balance and vehicle value to move back into balance.
At the same time, auto loan delinquencies are rising among borrowers with weaker credit. Data from credit rating agency Fitch shows that the share of subprime borrowers who were at least 60 days past due on their auto loans reached 6.65% in October, the highest level since records began in the early 1990s and up from 6.23% a year earlier. By contrast, the delinquency rate for prime borrowers with higher credit scores was 0.37%, unchanged from both the previous month and the same period a year earlier.
Industry analysts warn that if this trend of rising delinquencies continues, overall financial risk could increase, leading lenders to tighten credit standards and potentially weighing on the broader real economy.
BY HOONSIK WOO [woo.hoonsik@koreadaily.com]
