America's Pandemic Car Bubble Is Now Trapping Buyers in Debt
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About 30% of borrowers in the first quarter who traded in a car to buy a new one had negative equity, whereby they owe more on their loan than their car is worth, according to car-shopping website Edmunds. Those borrowers owed about $7,200 on average before getting a new loan, a 42% jump compared with the same period five years prior. “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.
About a third of Americans trading in an older car have negative equity, which has been typical in the industry for years. But the average amount Americans are underwater has skyrocketed, Edmunds said, as buyers try to unload cars bought during the pandemic at high prices.
The increased level of negative equity represents another strain on an auto market already under pressure from pricey vehicles and elevated interest rates. To offset those costs, more car buyers are taking on longer loan terms to keep monthly payments digestible. In the first quarter, the average loan was 70 months on new cars, according to Edmunds data. Car payments in excess of $1,000 are no longer uncommon and can stretch out more than eight years.
But consumers who are underwater on their loan end up paying more on average after rolling over the negative equity into their next car, compounding their debt even more.
The current situation dates to the pandemic’s semiconductor supply crunch, which led to a severe shortage of new cars available on dealer lots. Vehicle prices soared in response, and buyers—who either had the disposable income to spend or lacked other transit options during lockdowns—were willing to pay up.
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https://www.wsj.com/business/autos/car-owners-debt-negative-equity-3cfcd031?st=qsFdPa&reflink=desktopwebshare_permalink
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