American consumers are increasingly underwater on their car loans
Cars sit on the lot of a Chevrolet dealership on June 20, 2024 in Chicago, Illinois. The cyber attack on CDK Global, a software provider that helps dealerships manage sales and service, crippled the workflows of nearly 15,000 dealerships across the United States and Canada.
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DETROIT – A growing number of Americans with auto loans owe more than their vehicles are worth, according to a Tuesday report from Edmonds.com.
Auto Data and Consumer Research Company reported that the average amount owed on so-called upside-down loans rose to an all-time high of $6,458 in the third quarter. That compares with $6,255 in the previous quarter and $5,808 a year ago.
Upside-down car loans aren't necessarily scary on their own, but they're another indication of the pressure on American consumers with a growing number of underwater customers.
A sign of that strain came last month, when the Federal Reserve said auto loan delinquency rates by the end of 2023 had risen significantly from pre-coronavirus pandemic levels. They fell to historic lows during the global health crisis.
“It's not the end of the world for consumers to pay a price or two more than their car is worth, but it's not alarming to see such a significant portion of people affected at the $10,000 or even $15,000 level,” Jessica Caldwell, Edmonds' head of insights, said in a release.
Edmunds reports that more than one in five consumers with negative equity owe more than $10,000 on their auto loans. That includes 22% of car owners with negative equity who owe $10,000 or more, while 7.5% have negative equity of more than $15,000.
Consumers can deal with reverse car loans by holding on to the vehicle for a longer period of time. According to Edmonds, they should ensure regular maintenance to avoid further drops in value and costs.
“As prices and interest rates continue to rise, it's important for consumers to think beyond monthly payments and be honest with themselves about their home ownership habits,” said Evan Dury, Director of Insights at Edmonds. “A seven-year auto loan is a one-way ticket to negative equity if you know you're not the type of person to keep a car that long.”
The current situation in reverse lending is largely the result of consumers buying new vehicles in 2021 and 2022 amid inventory shortages due to the coronavirus pandemic and parts shortages. With the auto industry and inventories normalizing and their vehicles depreciating faster than expected, many then paid full price or more.
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