Negative-equity levels are ballooning. In the first quarter, on new-car sales, the percentage of trade-in vehicles with negative equity — nearly 33 percent — and the average amount of negative equity — $5,195 — were the highest on record.
Negative equity occurs when a car buyer owes a higher amount on his trade-in vehicle than the trade-in is worth. The average amount of negative equity has sat above $4,000 since 2013 because of a variety of factors, including the trends toward lengthening loan terms and declining used-vehicle values. Dealers are learning to cope with the challenges of getting underwater customers financed, and many lenders are keeping loan terms in check to stabilize vehicle equity.
Still, "negative equity is becoming a problem," Maryann Keller, automotive industry analyst and principal at Maryann Keller & Associates, said last month at CU Direct's Drive '17 conference. Even among superprime customers, those with the highest credit scores, negative equity can be painful, one lender employee told Keller. One of his customers suddenly lost his job and defaulted on an $80,000 SUV that was financed for 84 months, he told Keller.
"The bank took a loss on it of more than $45,000, and it was not just due to depreciation," Keller said. "It was due to the fact that they had rolled in a previous loan and allowed the funding of various aftermarket services."
This is only one example of the potential impact of negative equity when an unexpected situation arises. Falling used-vehicle prices are putting many consumers even further underwater when they trade in, said Anil Goyal, senior vice president of automotive valuation and analytics at Black Book. Many lenders said they are tightening their criteria to decrease exposure to subprime and deep subprime customers. Even so, negative-equity levels will continue to rise as used-vehicle prices decline, Goyal said.