Key Takeaways:
– The average amount of negative equity on underwater trade-ins rose to $6,458 in Q3 2024, marking an 11% increase from 2023.
– The trend of underwater trade-ins affects every vehicle type and demographic, suggesting it’s driven by the market itself, not individual purchasing habits.
– Average new car prices near record highs as longer loan lengths become the norm, while sub-$20,000 cars vanish from the market due to manufacturers focusing on high-margin premium segments.
– Despite the alarming trends, the situation may stabilize as the Federal Reserve eases interest rates and vehicle inventories regain balance.
Deepening Debt on Car Trade-ins
New research reveals that American consumers are diving deeper into debt for their automobile purchases. According to recent findings, those who are underwater on their trade-ins—owing more on their loans than their cars are worth—are deeper in the red than ever before. By the third quarter of 2024, the average underwater trade-in had a negative equity of $6,458. This staggering figure is up 11% from the previous year and represents the highest figure recorded in the last five years.
Analysing the Widespread Debt
The increase in negative equity doesn’t touch everyone evenly. Only 43% of new-car buyers had a trade-in, and of that number, over three-quarters were either break-even, had cleared their loans, or had positive equity on their old cars. However, the remaining 24% were underwater, owing an average of $6,458. While this percentage may seem alarming, it’s worth noting that it’s not at an all-time high. The five-year high for underwater trade-ins occurred pre-pandemic in 2019 when 34% of buyers were underwater, albeit less deep in the red.
The Situation for Underwater Buyers
Examining the situation for underwater buyers paints a more worrying picture. A significant 22% of these buyers were in the red by $10,000 or more on their trade-in. This sharp increase is partially accredited to the fact that the average age of an underwater trade-in vehicle has crept up to 3.6 years, the longest since the pandemic began. Simultaneously, loan lengths have been on the rise, with the average now exceeding 68 months.
Increasing New Car Prices and Car Dependence
The escalation in underwater trade-ins occurs against a backdrop of skyrocketing average new car prices, which were at near-record highs of $48,397 as reported last month. These prices are just shy of the all-time high recorded in 2022 during peak COVID-induced supply chain disruptions. The typical monthly payment for these cars has also hit record amounts, currently sitting at a whopping $756, fueled by a recent surge in interest rates from Federal Reserve hikes.
Market Effects and Possible Slowdown
America’s infrastructure is almost entirely car-dependent, creating a high demand for cars that remains constant regardless of changes in the economy. However, this surge in underwater trade-ins isn’t attributed to any single group; it’s a prevalent issue across all vehicle types and price points. Many signs indicate that it is the market itself causing this surge in debt.
There may be some light at the end of the tunnel as the Federal Reserve eases interest rates to allow easier borrowing and dealers hold off on charging markups as vehicle inventories continue to stabilize. Additionally, heavy incentives are returning to the market, a first since 2020.
Despite these positive changes, maintaining older cars for as long as possible remains the best strategy for many buyers to avoid sinking deeper into debt. The situation sounds a cautionary note for all consumers, reinforcing the importance of making financially wise decisions when purchasing a new vehicle.