During the height of the COVID supply shortage, dealers greedily hoarded money as customers who needed cars faced two choices: pay more or go without transportation. Now, many of those customers are looking to trade in their COVID-era purchases for something new, and finance departments are fighting an uphill battle trying to get them approved for credit as nearly a third of them are now completely dependent on their existing loans.
edmonds rang the alarm The number of underwater customers being denied new loans began to rise earlier this year. In March, we saw a report that more than 25% of buyers had negative equity from a previous loan. By Q2, that number had reached 30%, automotive news report, and have has been kept stable since then.
And the problem is self-perpetuating. Bringing negative equity into a new purchase means customers are effectively paying for two cars at the same time, while only taking advantage of the car they recently purchased. That deficit is then more likely to be absorbed into further purchases. The average monthly payment for a driver with negative equity is $944 per month – $167 more than the average buyer with no equity. Yes, the average new car payment in the US is now $777 per month.
That $944 figure certainly assumes the buyer can get financing at all One Says, this is becoming a common issue. Dealers are complaining that their finance departments are having to spend more time on each transaction because it’s harder to finance a loan when the buyer has negative equity, and tracking down a lender who will play ball slows down the process for everyone involved – including other customers still sitting in the showroom.
Perhaps even more worrying than the raw figures (and their implications) is that this latest round of negative-equity buyers doesn’t match traditional diversity. Typically, this pattern is most common with buyers who overextend themselves to purchase a rapidly depreciating luxury vehicle.
However, this time it is hurting those who have made far more responsible choices, including buyers of the Toyota Tundra, Ford F-150, Jeep Wrangler and Honda CR-V – which are known to hold their value far better than the average model. As one analyst put it, vehicle choice was not the problem; It was the terms of the financing that should take the lion’s share of the blame. Higher sticker prices, dealer markups, and more expensive credit all conspired to drive up loan numbers and drive buyers into trouble.
Potentially a lot of trouble. edmonds Now saying that the average buyer who was underwater on their trade-in was carrying around $7,000 in negative equity at the time of purchase. Over the course of the loan, they paid about $6,500 more than the average buyer in interest alone. That’s 60% more than the average buyer, all for the pleasure of doing it again in three years. Oh.
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