Negative equity ticks up

Analysts blame longer loan terms, an increase in the share of subprime borrowing, and a decline in used-car values from recent highs for the increase in negative equity.

Photo credit: BLOOMBERG
Related Links
Related Topics

More car customers are upside down at trade-in time, owing more on the trade-in vehicle than it’s worth.

Carrying negative equity on a trade-in vehicle makes it tougher for consumers to finance a new car because they have to borrow extra funds to pay off their old loan.

In the first quarter, 27.3 percent of new-vehicle buyers with a trade-in were upside down, up from 25.9 percent in the same period a year earlier and 23.6 percent in the first quarter of 2012, according to the Power Information Network.

With some ups and downs, the percentage of trade-ins with negative equity has been gradually increasing since the third quarter of 2011, when it was 22.2 percent, PIN data show.

Analysts blame longer loan terms, an increase in the share of subprime borrowing, and a decline in used-car values from recent highs for the increase in negative equity.

Experian Automotive said that in the fourth quarter of 2013, loans of 73 to 84 months were the fastest growing category when compared with the year-earlier period.

In the fourth quarter of 2013, loans with terms of 73 to 84 months accounted for 20.1 percent of new-vehicle retail volume, up 19 percent from a year earlier, Experian said. For used vehicles, the category rose 23 percent vs. the 2012 period, accounting for 12.5 percent of retail volume.

In an interview last month, Thomas King, senior director at the Power Information Network, said longer average loan terms were something to keep an eye on, but he said the increase in the average has been gradual and that’s a mitigating factor.

He said negative equity is probably a serious problem for only that small percentage of customers who roll a lot of negative equity in their trade-in into their new contract several times in a row.

You can reach Jim Henry at autonews@crain.com.

Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.

Or submit an online comment below. (Terms and Conditions)




Rocket Fuel