Negative equity levels bear watching

As many aspects of auto lending continue to rise, some growth areas aren't necessarily causes for alarm. But negative equity, if mismanaged, could be.

Auto loan balance continues to grow, rising 5.3 percent to $1.13 billion in the fourth quarter compared with a year earlier, according to Experian. New-vehicle loan terms have also consistently risen. The average new-car term was 69.06 months in the fourth quarter, up from 68.53 months a year earlier.

And in February, at 5.2 percent, the average interest rate on new-vehicle loans reached its highest rate since the third quarter of 2009, according to Edmunds.

After Experian's fourth-quarter "State of the Automotive Finance Market" report came out, Wells Fargo analysts questioned whether the rising auto loan balance and lengthening loan terms could become dangerous, even as auto borrowers' credit scores improve.

But those areas are healthy and likely will continue to be, says Experian's Melinda Zabritski. So which factor of auto lending should industry watchers observe with a critical eye? Consumers' trade cycles, Zabritski said.

If consumers trade in while they are still upside down on their loan, they will end up with negative equity, which occurs when a car buyer owes a higher amount on his or her trade-in vehicle than the trade-in is worth.

In the first quarter of last year, on new-car sales, the percentage of trade-in vehicles with negative equity was nearly 32.7 percent, a record high. The average amount of negative equity was $5,195, also a high. Since then, negative equity has improved, but only slightly. By the fourth quarter, 31.5 percent of trade-ins had negative equity, at $5,122 on average, according to Edmunds.

High negative equity levels could force many consumers to be out of the market longer than usual. Many auto finance levers affect negative equity levels. They especially tend to align with rising transaction prices, so as new-vehicle sales decline, negative equity could be manageable.

Still, negative equity trends are worth watching.

You can reach Hannah Lutz at -- Follow Hannah on Twitter: @hm_lutz

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