Negative equity "definitely has a big impact, but not independent of all these other things," Churchill told Automotive News. "It sounds like a cliche, but we really do look at each deal individually. Overall, the deal structure is going to affect payment-to-income, total indebtedness, overall affordability," he said.
Negative equity is when a customer owes more on their trade-in than the vehicle is worth. In April, in the new-car department, 33.2 percent of trade-ins had negative equity, up from 31.3 percent a year earlier and 29.2 percent in April 2015, data from J.D. Power and Associates' Power Information Network show.
Two other trends are contributing to the increase in negative equity, lenders said. First is a downward trend in used-car prices, which results in buyers learning that their trade-in isn't worth as much as they had hoped. Second is longer loan terms, as customers pursue lower monthly payments.
Extended-term loans make negative equity more likely because the borrower is paying off the loan on a slower schedule. Moreover, even as consumers have signed up for longer loans, few have lengthened the period they keep the vehicle, studies have shown. So, the odds are less that they will finish paying off the loan before trading in the car or truck.
Lenders can't do much about used-car prices, but some lenders, including Toyota Financial Services and Ford Motor Credit Co., report they are keeping a lid on extended terms, at least in part to try to curb negative equity indirectly.
"We have seen a trend of increasing negative equity in the industry over the last several years," said Dale Jones, Ford Motor Credit Co. executive vice president of the Americas.
"The increase is a result of lower used-vehicle values, longer-term financing and other factors, and it's something we tend to see in cycles of lower used-vehicle values," Jones wrote in an email response to written questions.