Advice | More car owners are underwater on loans due to lower trade-in values


It took nearly three years to find the car I wanted to replace my 2006 van.

I finally found the hybrid model I liked at the right price. It took awhile because I was waiting out the dealer markups ranging from a few thousand dollars to as much as $10,000 above MSRP, or manufacturer’s suggested retail price.

I refuse to pay any markup: They’re opportunistic money grabs on the most in-demand vehicles. They don’t add value for the consumer and could pile on unnecessary debt for many who finance.

“Motor vehicles saw some of the most pronounced and persistent price increases during the pandemic inflationary episode, as supply chains and chip shortages limited production,” according to a New York Federal Reserve report. “During this spell, auto loan balances ballooned.”

Now, here comes the bust.

That willingness to pay over MSRP may cost buyers dearly if they need to trade in a vehicle they still owe on. A growing number of Americans have gotten caught in this negative equity loop: They’re upside-down, meaning they owe more on their loans than the cars are worth.

Here’s why that’s a problem.

Nearly half of new-car purchases involve a trade-in, according to Edmunds.

In a new report, the car-shopping website found that 1 out of 5 new vehicle sales that involved a trade-in were upside-down in the fourth quarter of 2023, compared with 17.7 percent in the last quarter for 2022 and 14.9 percent in the same period for 2021.

While that’s not an all-time high, the amount owed is.

The average new-car buyer with an upside-down loan owed a record $6,064 at the end of 2023, up from $5,347 a year earlier and $4,143 in the last quarter of 2021.

This reverses the trend of the last two years when dealers paid extraordinarily high prices for used vehicles because they were desperate for inventory.

The economics have changed quite a bit, said Ivan Drury, Edmunds’ director of insights.

“Some people got accustomed to the idea that the dealer would buy the car off of me for the same price that I bought it last year because a year and a half ago, that’s what they did,” Drury said.

Newer model vehicles are seeing the most dramatic drops. In the fourth quarter, the average transaction price for a year-old vehicle dropped to $38,720, a $6,763 decline. The decrease is less for a two-year-old vehicle but still significant: $32,583, a $3,294 drop.

High vehicle prices and rising auto loan rates have pushed consumers to the edge of affordability.

The average monthly payment on a new vehicle hit a record-high $739 in the last quarter of 2023, according to Edmunds. It was $717 a year earlier.

The share of borrowers paying $1,000 or more a month swelled to 17.9 percent, also a record, during that period. That compares with 15.7 percent for the same three months of 2022.

There’s another problem that may be brewing — auto loan delinquencies.

“Loans opened during 2022 and 2023 are, so far, performing worse than loans opened in earlier years, perhaps because buyers during these years faced higher car prices and may have been pressed to borrow more, and at higher interest rates,” according to the New York Fed.

An annualized 7.7 percent of auto loan balances transitioned into delinquency in the fourth quarter of last year, the agency said.

So, what’s a consumer to do?

Here are a few ways to avoid being upside-down.

Don’t rush the purchase. If you aren’t in a desperate situation for a vehicle, take your time and shop around.

I wanted to upgrade, but it wasn’t a necessity. I was looking for newer safety features besides the benefits of having a hybrid. But I was not willing to pay over MSRP. My patience paid off with a fair deal and no markup. (I also skipped purchasing overpriced warranty coverage.)

Longer loans allow people to buy more expensive vehicles. And the sticker shock is less because buyers focus on the monthly payment rather than the overall cost of the car.

The majority of loans for new vehicles financed through a dealer range from 67 to 84 months, according to Edmunds. Just under 6 percent were for 48 months, a term I recommend if you have to borrow for your car.

Remember that with a longer-term loan, the value of the car declines faster than the loan balance. And the longer the loan, the more interest you pay.

Shop within your affordability range

Far too many consumers walk into a dealership with one thing on their minds — the monthly payment.

Fixating on just the monthly payment is the worst way to shop for a car.

Consider the total cost of the purchase, including interest, maintenance and insurance. With more borrowers upside-down on their auto loans at the start, there’s a greater need to purchase gap insurance, which generally will pay the difference between the cash value of your vehicle and the outstanding balance on your loan or lease.

If you want more personal finance advice that’s timeless, order your copy of Michelle Singletary’s Money Milestones.

Don’t give in to vehicle fatigue

Okay, maybe you don’t want to hold on to your vehicle as long as I did — 18 years is far longer than average.

The average trade-in for a new car is 6.1 years old, according to Edmunds.

“For a lot of people, when they finally sign that last check, when they finally own the car outright, they feel so validated and free,” Drury said. “But the problem is they also feel like they should get a new car because they paid off their existing one. Don’t you want to have no payments for a longer time?”

My strategy for paying cash for a car and avoiding being upside-down: Take the money you were paying on a loan and save it — even invest it — until you need or want to upgrade. After your first auto loan, you won’t need another.

Get off the crazy cycle of getting out of and into auto loans.


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