Factory executives are keenly aware of the growing number of upside-down customers, and they're worried that the mounting debt eventually could hurt the new-vehicle market.
"Negative equity is an industry-wide problem," says Gary Dilts, senior vice president of sales at the Chrysler group. "Maybe people will hold off on (buying) or being in a negative-equity situation."
A.J. Wagner, president of Ford Credit North America, says a customer can't be upside down forever.
"If you have somebody who is in a negative-equity situation, ultimately, if they want to trade out, they've got to cover that. They either have to pay it off, or somebody's got to carry it, or (they) roll it into the next transaction," Wagner says. "They are rolling it, but at some point the roll effect is going to come to a screeching halt."
Wagner says Ford is trying to contain the growth of 72-month financing in part because it takes longer to build equity in the vehicle, creating a credit risk. Ford Credit approves only borrowers with high-rated credit for 72-month loans.
Paul Ballew, GM executive director for market and industry analysis, says General Motors Acceptance Corp. also is curtailing 72-month loans. It has stopped offering 72-month loans with 0 percent interest on 2004 models but does offer them with interest.
Here's how a typical customer could get into trouble:
Say a Michigan customer puts $1,500 down on a $30,000 2004 Ford Explorer XLT with a 72-month loan. In three years, according to residual-value projections, the vehicle will be worth $12,000, but the customers still will owe $16,200.
And that $4,200 of debt has to land somewhere.