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Record number of car buyers 'upside down' on trade-ins

25K views 274 replies 93 participants last post by  Aonarch 
#1 ·
http://www.usatoday.com/story/money...er-car-buyers-upside-down-trade-ins/94506786/

DETROIT -- The wave of easy credit and longer auto loans has left a record percentage of consumers trading in vehicles that are worth less than what they owe on their loans.

In auto finance parlance, these folks are underwater, or upside down. They already are affecting the market as automakers boost incentives and subprime lenders monitor their delinquency rates more closely.

So far this year, a record 32%, or nearly one-third, of all vehicles offered for trade-ins at U.S. dealerships are in this category, according to research by Edmunds.com. When these people go to buy a new vehicle they must add the difference between their loan balance and the vehicle's value to the price of the one they want to buy.

For perspective, the lowest the underwater percentage has been was 13.9% in 2009, the depths of the Great Recession when credit was tight. The previous high was 29.2% in 2006, about when the housing market was near its frothiest point.

“There’s been a lot of water building behind this dam for some time because of higher transaction prices, lower down payments and long-term loans," said Greg McBride, chief analyst with Bankrate.com, a consumer finance information service.

The average new car loan is for 68 months, according to Experian Automotive, which tracks the auto finance market. But subprime borrowers, generally those with FICO credit scores in the low 600s or lower, are borrowing over an average of 72 months, or six years.

While those loans reduce monthly payments, they also mean that the buyer's equity, or the portion of the loan principal paid off,grows more slowly than the vehicle depreciates.

"It’s problematic for the consumer because there’s no foolproof way to eliminate his financial exposure," McBride said. "If the car gets stolen, is totaled or you get new car envy while you’re upside down then it’s a big problem."

This is happening as the average selling price of a new vehicle is near a historic high of about $34,000. Some of that increase is driven by consumers' preference for larger, fully equipped pickups, SUVs and crossovers.

The result is consumers borrow more to get the vehicle they want. The average new auto loan was $29,880 in the second quarter of this year, according to Experian Automotive. That's 4.8% higher than a year earlier.

Moreover, leasing, which has reached record levels of more than 30% of all vehicle sales, has grown more popular for several years.

Already, especially in segments such as subcompact, compact and midsize cars, used car values are falling as a wave of 3-year-old models are returned by lessees. This increased supply is pushing down the price dealers are willing to pay for them at auctions.

Just last week, Ford Chief Financial Officer Bob Shanks told analysts that the company's finance arm, Ford Credit, cut its forecast for 2017 pretax profits because of declining auction values for used cars.

Credit agencies, such as Moody's, Standard & Poor's and Fitch, so far, have expressed mild concern about the trend. Their focus is on the $38-billion market for securities backed by auto loans. These are bundles of auto loans, similar to the tranches of mortgages that collapsed in the 2008 crash of the housing bubble.

But they are also different. History shows borrowers are more likely to stay current on their car loans than on their house payments if the economy weakens. Lenders can repossess automobiles more quickly than it takes for mortgage holders to foreclose on a house.

Fitch reported that 60-days-plus delinquencies on subprime auto loans rose to 5.05% in September, the second highest level since 2001, and 13.2% higher than a year earlier.

"When you look at recessionary levels where unemployment was near 10% in 2009 and late 2008, we touched 5.04%," said Hylton Heard, senior director at Fitch Ratings. "Today you’re pretty much at that peak."

Fortunately, unemployment is down to 4.9% nationally. Prime borrowers have a 60-day delinquency rate of only 0.44%. Those factors tend to offset the higher risk in the subprime market.

New vehicle sales are expected to continue slightly below their record year-ago levels in November, according to J.D. Power and LMC Automotive.

Yet even their forecast flags some warning signs.

Incentive spending -- discounts or extras to lure buyers to close a deal -- in early November rose to $3,886 per vehicle, up 15% from $3,374 from November 2015 and the second-highest level ever behind the record $3,939 set in September.

"People's monthly payments are being kept very low by low interest rates that most manufacturers are willing to subsidize," said Ivan Drury, senior analyst at Edmunds.com. "But if we see those rates go up a bit, some of these people won’t be able to afford their cars."
 
#4 · (Edited)
Those are some scary numbers. America has 38 Billion dollars in auto loans.

The average new car loan is for 68 months, according to Experian Automotive. But subprime borrowers, generally those with FICO credit scores in the low 600s or lower, are borrowing over an average of 72 months, or six years. 60-days-plus delinquencies on subprime auto loans rose to 5.05% in September, the second highest level since 2001, and 13.2% higher than last year.

I am sensing a auto bubble!:vampire:

"People's monthly payments are being kept very low by low interest rates that most manufacturers are willing to subsidize," said Ivan Drury, senior analyst at Edmunds.com. "But if we see those rates go up a bit, some of these people won’t be able to afford their cars."
Loan terms are fixed rate. I've never heard of an adjustable rate auto loan. If rates go up then it will effect the number of new and used car purchases. If rates go up it could be a major slowdown for the auto industry.
 
#21 ·
Those are some scary numbers. America has 38 Billion dollars in auto loans.

The average new car loan is for 68 months, according to Experian Automotive. But subprime borrowers, generally those with FICO credit scores in the low 600s or lower, are borrowing over an average of 72 months, or six years. 60-days-plus delinquencies on subprime auto loans rose to 5.05% in September, the second highest level since 2001, and 13.2% higher than last year.

I am sensing a auto bubble!:vampire:

Loan terms are fixed rate. I've never heard of an adjustable rate auto loan. If rates go up then it will effect the number of new and used car purchases. If rates go up it could be a major slowdown for the auto industry.
Yeah probably. Car companies will hit a natural wall that can't be broken through, when too many people simply cannot get financing to roll negative equity into a new car purchase. Those people will just be stuck and need to hold onto their cars, which isn't a bad thing in the end, it will at least maybe teach some that you don't need a new car every other year, especially ones with long terms.
 
#5 ·
People need to buy what they can afford, not what they can "get financed" on.

At least one huge local dealer is advertising the "zero down, zero payments until next spring" crap.
That's one way to guarantee I'll be upside-down for the entire loan.
 
#211 ·
True the problem is cars and trucks are such lusty things to some people they let the devil get the best of them. I've already heard a million cases of lotto winners who are now broke to begin with. :facepalm:
 
#11 ·
Just came here to post that story, and saw this. Very scary to see those numbers (32%!!!), and interested to see how this will impact US consumers when the transition to fiscal conservatism begins in DC in January. I see no reason to trade in a car that I will lose my a** on unless I'm having problems with it, or my lifestyle dramatically changes.
 
#16 · (Edited)
The auto industry has been approaching a bubble burst for years. Prices keep going up, up, up, but incomes don't.

You can spend $28k on a Civic now. While an inflation adjustment might indicate that this is right in line, incomes haven't risen proportionally, creating a widening gap between incomes and auto prices. It's becoming a large enough gap to the point where if people actually bought what they could afford, there would be a ton of people driving base Fiestas and Versas, which doesn't align with what people could actually afford in past decades, since incomes went up proportionally as well - you used to get a cost of living increase equal to inflation, plus a merit raise every year in most jobs, now you're lucky if you get a total raise of 1-2% every 18-24 months. Whoop-de-doo, going to get that kitchen remodel done with that whopper of a raise.:rolleyes:

The bubble is going to burst soon as the boomers die off, because millenials couldn't give two sh!ts about driving a car, let alone a new one.
 
#23 ·
You can also get a Civic for $18k. Meanwhile a 2006 Civic DX was $14,760. That's an incredible value increase.
 
#17 ·
of no surprise. people taking 72 month payments and then trading in after 2-3 years only to roll into another 72 month are going to have these major issues.
 
#19 · (Edited)
As someone mentioned, it's people buying cars on long loans and trading them in years before their current note is paid off. So all that negative equity is rolled into another long-term loan that they will do the same thing on again.

I've been at my in-laws for the past week, a small town near the coast in NC. It's crazy the number of higher-end vehicles, that were obviously bought used, that I've seen with rent-a-center chrome rims and cheap kumho tires.
 
#22 ·
I've been at my in-laws for the past week, a small town near the coast in Nc. It's crazy the number of "expensive" used vehicles I've seen down with rent-a-center chrome rims and cheap kumho tires.
Yeah this isn't a fixable problem. Even if you overhaul financing laws, people will just go around them, similar to how our increased lending laws simply led to the rise of pawn shops and payday loan stores to levels never before seen in history. You can't fix the problem! People who are determined to waste their money are going to find out how. If they can't do it through traditional banking, they'll resort to title loan places, payday loans, or buy-here, pay-here scams where the "cash price" is $10,000 or you can get so-called 3% financing, but the vehicle price goes up to $14,000, meaning you have to let them build in 40% interest before the loan even starts. Anybody who has never been poor obviously doesn't know how this works and you look foolish to those of us who do know how it works. People who are poor and determined to have something will find a way - legal or not - to get it. You can't stop them, ever.
 
#20 ·
on the upside, for those in the used market, things are great right now. cheap credit, lots of leased vehicles with low miles, people who are desperate to get out of high monthly payments, etc. :laugh:
 
#31 ·
Eh, I'm probably about to do it pretty soon (for the first time) if I can make the numbers work. We don't want this Mirage anymore due to several factors and I am probably $2-3k upside down on it.

We were thinking about getting something like a CR-V LX ($21xxx at the moment) but with the negative equity factored in just decided to go one class smaller and end up with roughly the same overall expenditure. It is my wife's car and she has declared that she wants something we don't have to replace for 15 years/250k miles so if I get a Corolla LE ($18,500) and finance it for 72 @ 0% the payment will be about $315-$320 with $0 down.

The Mirage would have 80k+ on it at year five based on the current rate of accrual and it feels like we would need to replace it pretty soon after that, so we decided we might as well ditch it and get something that will last the long haul.
 
#61 ·
We don't want this Mirage anymore due to several factors and I am probably $2-3k upside down on it.
oh no- the experiment is over? did something else happen to it besides the vandalism? I always thought it was interesting to hear the updates on the un-TCL car.
 
#49 ·
I like this thread. It really has taken the opinion out of the equation and is mostly based on basic financial facts. Then when someone who's opinion is oh poor buyer instead of buyer beware people attempt to justify their opinion. Any spot where someone attempts to "sell" you something your spidey senses should tingle. College is the biggest fraud of any of these financial disasters.
 
#72 · (Edited)
I get that people are saying that 0.9% is basically free money but I can't justify a new car when you lose 40% of the value in the first 3 years. I rather buy a 3-5 year old car that someone else lost money on and didn't drive to much, then I can invest or spend the money I saved somewhere else.

Everyone thinks they deserve new and don't think there is another option. Look at phones, everyone has to have the newest version, yet I still like my 4 year old phone since it works.

Edit: And people don't care about losing 40% while happily earning 4-7% on investments.
 
#77 ·
I get that people are saying that 0.9% is basically free money but I can't justify a new car when you lose 40% of the value in the first 3 years. I rather buy a 3-5 year old car that someone else lost money on and didn't drive to much, then I can invest or spend the money I saved somewhere else.


Edit: And people don't care about losing 40% while happily earning 4-7% on investments.

X2
 
#76 ·
My goal is to be car-payment free by February, so that we can get my wife down to part time. But honestly, having a monthly car payment doesn't bother me. Even with my Sonic and Borrego, my monthly payments were only $360/ mo.

However, once my wife graduates, we will likely be a dual-lease household with a paid-for truck.

Chris
 
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