Upside-down buyers - consumers who owe more on their trade-ins than the vehicles are worth - have become common in showrooms. But for dealers who sell some second-tier Asian brands, such customers remain more of a flood than a trickle.
More than one-third of U.S. buyers who traded in for a new vehicle in 2005 were upside-down, says J.D. Power and Associates' Power Information Network. Power reports that 33.6 percent of trade-ins last year carried negative equity, down from 37.4 percent in 2004. In the first quarter of 2006, the rate was 32.9 percent.
The trend is even more prevalent at Mitsubishi, Isuzu, Suzuki and Kia. About half, and often more, of the trade-ins for those brands' vehicles carry negative equity.
Buyers fall into negative equity for numerous reasons. Some may have put little or nothing down when they bought their vehicles. Some own vehicles with poor resale value, or they took loans with long terms so they could keep monthly payments low. Sometimes, it's a combination of factors.
Negative equity doesn't just place a financial burden on the consumer, who likely will have to roll over the outstanding debt into the next vehicle purchase. Dealers and finance companies also suffer, says J.D. Power analyst Tom Libby.
"It also makes it harder to sell a vehicle, because you first have to get the customer out of the old vehicle," Libby told Automotive News. "It's harder to close the deal, it's a cause of rebates, and it also exposes the finance company" to more risk.
Upside-down is new normal
At Mitsubishi dealerships, 56.1 percent of customers who traded in vehicles last year had negative equity. That figure represented a decrease from 60.3 percent in 2004. The rate fell to 54.3 percent in the first quarter of 2006.
Similarly, 53.8 percent of Isuzu customers who made trade-ins last year were upside-down. That number rose slightly in the first quarter of this year to 54.9 percent, the same rate as in all of 2004.
At Kia and Suzuki stores, just under half the trades were upside-down in 2005. So far this year, those rates have dipped.
The Asian automakers insist they don't market directly to customers who are upside down. Instead, they say, many upside-down consumers gravitate to them because those buyers want inexpensive new vehicles.
In the first quarter of this year, Power says, Suzuki had the lowest average transaction price of all vehicle brands, at $16,390. Power defines transaction price as the price on the sales contract minus any customer cash rebates.
Kia, Mitsubishi and Isuzu had the fourth-, eighth- and ninth-lowest transaction prices, respectively, among 37 brands studied.
By contrast, a fairly small percentage of people who buy luxury, near-luxury and niche-brand vehicles come to dealerships with negative equity.
Low residual values
Data from the Automotive Lease Guide suggest that low resale values are hurting the second-tier Asians. The guide predicts "residual value" - what a vehicle will be worth at the end of a lease, typically 36 months.
Isuzu vehicles kept just 33 percent of their value three years after they were sold, according to 2005 guide data. Kia and Suzuki models held on to 34 percent of their value.