As we reported in our F&I Insight section this week, negative equity levels have reached record highs, which has caused some concern in the industry. With 32.8 percent of trade-ins on new-vehicle sales underwater and the negative equity amount at nearly $5,200 in the first quarter, the levels are shockingly high, but it's important to remember that multiple levers affect the overall state of the industry.
As I talked with sources, it was impossible to discuss negative equity without talking about several other industry trends. They're all connected and have direct or indirect effects on one another.
There are some trends that could perpetuate negative equity, while others could improve it.
Lengthening loan terms without lengthening the trade-in cycle puts customers upside down, and loan terms have continued to grow. The average new-vehicle loan term in the first quarter was 68.5 months, up slightly from 68.1 a year earlier, according to Experian. Even so, lenders have said they are being prudent. Typically, the longest-term loans go to prime consumers.
Loan terms are lengthening to accommodate rising transaction prices. Negative equity increases are in line with growing transaction prices, but as Edmunds' Ivan Drury pointed out, more than $5,000 on average is "still a lot of money to roll over."
Falling used-vehicle values could also accelerate negative equity as customers' vehicles are worth less than they expected at trade-in.
But at the same time, higher used-vehicle sales volume combined with lower new-vehicle sales volume could reduce negative equity amounts because customers spend less on a used vehicle than a new vehicle.
Plus, dealers and lenders are asking for higher down payments, which would improve customers' equity. In May, the average down payment amount reached a near-record high at $3,801, according to Edmunds.
The future of negative equity is not black and white. It's certainly worth watching, but we're not doomed. There are some levers the industry can use to help stabilize or improve it.