Chris Martin knew he needed a bigger car as the birth of his fourth child approached, but he and his wife were already $14,000 underwater on their two vehicles.<\/p>\n
So the couple proposed an unusual two-for-one deal with an Atlanta-area auto dealer<\/a> in 2020: trading in<\/a> both of their vehicles so they could afford a three-row Ford Explorer<\/a>. Their total loan after factoring in negative equity, a service contract, fees and other costs ballooned to $66,000 on the $49,000 Explorer<\/a>.<\/p>\n Despite a lot of progress on the debt, he feels uneasy. \u201cI don\u2019t want to be paying interest on cars that I don\u2019t even have anymore,\u201d said Martin, a 36-year-old data engineer.<\/p>\n The build-up in negative equity \u00a0\u2014 or the amount that debt exceeds a vehicle\u2019s value \u2014 is rattling consumers and raising alarms within the industry. Though it\u2019s not unusual for drivers to carry negative equity, some dealers<\/a> say more people are arriving at their lots up to $10,000 underwater, or \u201cupside down,\u201d on their trade-ins. They\u2019re buying at still-sky-high prices and rolling<\/a> debt from one car to another and even onto a third. Loans are commonly stretching to seven years.\u00a0<\/p>\n \u201cAs trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity,\u201d said Ivan Drury, director of insights at auto-market researcher Edmunds. \u201cUnless American car shoppers break their habit of buying again too soon, we\u2019ll see the negative equity tide continue to rise.\u201d<\/p>\n Even if the U.S. economy avoids a recession this year, consumers will likely struggle to make payments on their auto loans<\/a>, especially with the Federal Reserve planning to keep raising interest rates. The average new-car interest rate rose to 6.9% in January from 4.3% a year earlier, according to Edmunds. With car prices<\/a> still elevated, demand high and inventory levels relatively low, Ford Motor Co., General Motors Co<\/a>. and other automakers continue to rake in sizable profits.\u00a0<\/p>\n For the typical American, a new car<\/a> is increasingly out of reach. Today, about two out of 13 people are making monthly car payments<\/a> of $1,000 or more. For many, there\u2019s no choice: They have few or no public transportation options and need a car to get to work, bring children to school and buy groceries.<\/p>\n \u201cBecause these car loans<\/a> are generally<\/a> unaffordable at the outset, that means that every month, borrowers are getting closer to the financial edge,\u201d said Kathleen Engel, a law professor at Suffolk University.<\/p>\n The cost of new vehicles<\/a> has risen 20% since the start of the pandemic, while used vehicles are still up 37% even after cooling in the fall. For a brief period, car owners hit a topsy-turvy market where they could sell some used cars for more than they paid for them. That helped negative equity plummet earlier in the pandemic.<\/p>\n But as more consumers deplete savings accumulated during the pandemic, they\u2019re falling underwater again.\u00a0<\/p>\n For trade-ins that carry negative equity, the average amount is approaching prepandemic levels at $5,500, according to Edmunds data. The surge in prices and prevalence of 84-month loans are fueling concern among consumer advocates and within the auto industry.<\/p>\n Pete Kesterson is the general manager of a dealership in Falls Church, Virginia. On one side of his lot is the Volvo showroom, and on the other is the Kia showroom. He\u2019s much more concerned about the customers shopping for Kias \u2014 who rely on financing more heavily \u2014 than he is for Volvo buyers who he says often pay with cash.<\/p>\n \u201cIt\u2019s going to come, and it\u2019s going to bite us,\u201d said Kesterson, referring to negative equity, which he believes will worsen. \u201cNow, we\u2019re selling the cars for so much more, and financing for longer, at a much higher interest rate. There are some challenges coming down the pike.\u201d<\/p>\n Negative equity has already bitten Shawna Ballou, a 45-year-old mother of five from Tacoma<\/a>, Washington, who feels \u201ctrapped\u201d in her Ford Escape<\/a>. Four years ago, she traded in a Chevy Malibu<\/a> and bought a six-year-old Escape<\/a> for around $16,000. After including the negative equity on her trade, taxes and other fees, she financed more than $25,000 and is paying it off over seven years.<\/p>\n She researched the life expectancy of her car, and she\u2019s worried she\u2019ll wind up owing on a car that won\u2019t even run.\u00a0<\/p>\n \u201cI can\u2019t even get anyone to refinance me, because the value of the car does not add up,\u201d said Ballou, who\u2019s working two jobs and trying to get her own business off the ground.\u00a0<\/p>\n The upswing in negative equity is on the radar of officials at the U.S. Consumer Financial Protection Bureau. They are closely monitoring it now that the safety net of selling a used car to climb out of debt is disappearing.\u00a0<\/p>\n \u201cConsumers may have been less likely to find themselves underwater on car loans because of rising used-car prices,\u201d said Ryan Kelly, acting auto finance program manager at the CFPB. \u201cThat may be changing.\u201d<\/p>\n To respond to higher vehicle costs, lenders have kept extending the length of auto loans. Companies such as Upgrade Inc., which offers auto refinancing, also are tightening standards for who qualifies for financing \u2014 a trend they predict will continue if the job market worsens and rates keep climbing.<\/p>\n \u201cThe more likely scenario is the worsening of economic conditions combined with the prospects of a continued decline in car prices, making it harder for consumers to qualify for the car they want,\u201d said Renaud Laplanche, Upgrade\u2019s co-founder and chief executive officer.<\/p>\n For now, even seven-year loans are performing well, said Margaret Rowe, a senior director with Fitch Group Inc. who\u2019s focused on auto financing and asset-backed securities. But if the prices of cars stay high and lenders keep extending loan terms, opting to offer them to borrowers with lower credit scores, that could change, she said.<\/p>\n In January, severely delinquent auto loans hit their highest rate since 2006, based on Cox Automotive data.<\/p>\n One wild card for consumers is the fluctuation in used-car values. After a historic climb during the pandemic, values fell 13% from their peaks as of January, but suddenly climbed again in February, according to the Manheim Used Vehicle Value Index. If they fall further, anyone who bought at the top of the market will fall further into the trap of negative equity.<\/p>\n Subprime consumers coming in with negative equity and looking to buy another car are particularly vulnerable, said Todd Nelson, senior vice president of strategic partnerships at LightStream, part of Truist Bank.<\/p>\n \u201cThey\u2019re just continuing to amass debt in a way that\u2019s not very financially responsible,\u201d Nelson said. \u201cFor folks in that space, if they can afford to, they\u2019d be far better off staying in that vehicle.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" Chris Martin knew he needed a bigger car as the birth of his fourth child approached, but he and his wife were already $14,000 underwater on their two vehicles. So the couple proposed an unusual two-for-one deal with an Atlanta-area auto dealer in 2020: trading in both of their vehicles so they could afford a […]<\/p>\n","protected":false},"author":1,"featured_media":8313,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[2],"tags":[],"class_list":["post-44248","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry"],"_links":{"self":[{"href":"http:\/\/autosector.com\/index.php?rest_route=\/wp\/v2\/posts\/44248","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/autosector.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/autosector.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/autosector.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/autosector.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=44248"}],"version-history":[{"count":0,"href":"http:\/\/autosector.com\/index.php?rest_route=\/wp\/v2\/posts\/44248\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/autosector.com\/index.php?rest_route=\/wp\/v2\/media\/8313"}],"wp:attachment":[{"href":"http:\/\/autosector.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=44248"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/autosector.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=44248"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/autosector.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=44248"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}$1,000 payments<\/span><\/h2>\n
Delinquent loans<\/span><\/h2>\n