Negative Equity Among Car Owners Reaches Pre-COVID Rates
An increasing number of drivers reportedly owe more on their loans than their cars are worth.
It’s a situation known as negative equity, and last month, American consumers were “underwater” on their loans by an average of $6,054, the most since April 2020, Bloomberg News reported Saturday (Dec. 16), citing data from automotive information firm Edmunds.com.
As that report noted, it is a dangerous place for many consumers to find themselves, as a wave of car-buying was followed by rising interest rates that helped trigger a rise in repossessions.
“We’re in this situation where, combined with the cost of the vehicles being so high and the interest rates being so historically high, you have a lot of people who are in bad car loans,” Joseph Yoon, consumer insights analyst for Edmunds, told Bloomberg.
According to the report, a number of factors have led to this situation. For one thing, the average rate on a loan for new cars is 7.4%, and 11.6% for a used model. Dealers and lenders have in recent years begun offering six- and seven-year loan terms and reduced down payments, making it tougher for consumers to build equity in their car.
And while the value of used cars soared during the pandemic as supply chain issues made vehicles scarce, they’ve since plummeted more than 20%, leaving many drivers with a quickly depreciating vehicle in their driveways.
The news follows recent research by PYMNTS Intelligence and Sezzle showing that one-third of American consumers owe more than $250,000 in outstanding debt, primarily consisting of mortgages and auto loans.