As the economy strengthens, more consumers are trading in their vehicles mid-loan to purchase a new one, despite carrying negative equity, Edmunds.com says. For some of those short-time owners, leasing may be a better option.
Though October of this year, 32 percent of vehicles traded-in for a new vehicle had negative equity, up 2 percentage points from the 2015 period, according to Edmunds.com. On average, the negative equity on those trade-ins was $4,832, a record since Edmunds began tracking the data in 2005 and an 8 percent rise vs. the first 10 months of last year.
“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” senior analyst Ivan Drury said in a statement. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”
The trend was similar about a decade ago, when the housing market was booming, Drury told Automotive News.
In 2005, 26 percent of trade-ins on a new-vehicle purchase had negative equity. In 2006, 28 percent did. The percentage fell in 2007 and 2008, but every year since 2009, the percentage of trade-ins that were under water and the amount of negative equity have increased.
“As the economy went under, the number went down to an all-time low of 13.6 percent” in the third quarter of 2009, Drury said. Consumers couldn’t get a new-vehicle loan. “Consumers were forced into doing what most consumer advice would say is the right thing”: waiting out the negative equity, he said.
Especially with subsidized rates and longer loan terms, some consumers are confident they can handle rolling over their negative equity, Drury said.
Many also have the mentality of a five-year buying cycle. “However, with the way they are financing cars today, even though [long-term loans] look attractive, if you’re on a five-year purchase cycle but a six-year loan term cycle, you’re going to be in negative equity.”
The lease benefit
Consumers who have trade-ins that are only 2 to 3 years old should consider leasing, Drury said.
“They can get into a new car with great technology every few years without having to worry about how much they still owe on their trade-in,” he said.
In the third quarter, the average monthly payment on a new-vehicle purchase was $77 higher than the average monthly payment on a new-vehicle lease, according to Edmunds.
Lease penetration is at its highest ever, making up an estimated 33 percent of all new-vehicle transactions from January though October 2016.