That’s according to a report Sunday (April 26) from The Wall Street Journal (WSJ) which says consumers who attempt to trade in old vehicles for new ones are learning their cars aren’t worth what they owe.
Roughly 30% of borrowers who traded in a car to purchase a new one during the first quarter had negative equity, the report said, citing data from car-shopping website Edmunds. Those borrowers owed around $7,200 on average before getting a new loan, a 42% increase compared with the same period five years ago.
“The higher it goes, the chances are that people are never going to get themselves out of the situation,” said Jessica Caldwell, head of insights at Edmunds.
According to the report, around one-third of Americans trading in an older vehicle have negative equity, which has been an industry standard for years. However, the average amount Americans are underwater has surged, Edmunds said, as consumers try to sell-off cars purchased during the pandemic when prices were much higher.
The increased level of negative equity marks another source of pressure on an auto market already under strain from costly vehicles and high interest rates, WSJ added.
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To deal with these costs, car buyers are increasingly taking on longer loan terms to help manage their monthly payments. In the first quarter, the average loan for a new car was 70 months, Edmunds said. Car payments of more than $1,000 are no longer unusual, and can last for more than eight years.
However, WSJ added, consumers who are behind on their loan wind up paying more on average after folding their negative equity into their new car, leading to even more debt. The report characterizes the situation as another sign of a “K-shaped economy,” in which wealthier people thrive while others struggle.
PYMNTS CEO Karen Webster has been keeping track of this shift for months. Affordability has turned into a national conversation, she argued, and not because the American consumer no longer knows how to budget.
“The biggest components of household budgets — housing, healthcare, insurance, utilities, transportation and debt service — have reset higher … [and] are not expenses consumers can easily comparison-shop, negotiate away or substitute out of,” Webster wrote in January.
