More Car Owners Are Underwater

We have a serious problem in America, one Automotive News did a great job highlighting recently. A growing number of car owners are underwater on their loan. Before you just rattle off your over-simplified one reason for why this is, stop. This is actually a complex problem with many factors coming together to make the storm. And we need to do something before disaster strikes.

Many people need a car, because they live in areas where other forms of transportation are unfeasible. The problem is that the cost of the average vehicle keeps going up, but wages aren’t increasing. To help with this issue, banks have been offering longer and longer loan terms. It used to be almost impossible to get a loan term longer than 5 years. Today, many people get pushed into 72-month loans, if not longer, to keep the monthly payments low.

Edmunds analyzed US vehicle trade-in data for the first quarter of 2017. It found 32.8 percent of vehicles traded in had negative equity, with the average amount being $5,195. Both numbers are records. People keep trading in their car every few years, even though the longer loan terms means they have more negative equity.

Add to all this a dip in used car values. Thanks to the recession, we have a flood of off-lease and trade-in vehicles. Automotive News’ report says for 27 months straight, average used vehicle prices have gone down.

Exactly how all this will shake out is anyone’s guess. New car inventories are super high, too, because automakers apparently didn’t see this coming.