Here are some fun facts for you to think about late at night when you can’t sleep: In the U.S., private-sector wages rose about 4% to 5% annually during the pandemic, on average. That trend is projected to cool to a more “normal” 3%-4% this year, returning to pre-pandemic levels. In the same pandemic period, Bloomberg reported this week, the cost of new cars rose 20% and used cars went up a whopping 37%, thanks to inflation, weird supply issues, dealer markups and other factors.
It’s no wonder, then, that people are struggling to make their car payments. Moreover, given the paltry supply of cars and their commensurate price increase, the practice of rolling in negative equity—when you combine what you still owed on your trade-in with a new loan of some sort—has been skyrocketing as of late.
Dealers who spoke to the business-focused news outlet say they’ve seen an uptick in people owing $10,000 or more on their trade-ins, taking out loans for seven years or more and stretching their budgets beyond what’s comfortable — all in order to deal with sky-high new and used car prices.
That Bloomberg story opens with an anecdote from a couple who needed a bigger vehicle after their fourth baby was born, but they still owed money on their two current cars. So they did this instead, but they don’t have a good feeling about it:
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 three-row Ford Explorer. Their total loan after factoring in negative equity, a service contract, fees and other costs ballooned to $66,000 on the $49,000 Explorer.
Despite a lot of progress on the debt, he feels uneasy. “I don’t want to be paying interest on cars that I don’t even have anymore.”
“The cars are too damn expensive” is a trend we’ve been covering for a while now. You probably know the issues, and you’ve possibly even had to deal with some version of this yourself. It’s best to keep a vehicle as long as you can, maintain it, then pay it off completely, but as with that couple above, life sometimes throws curveballs your way. And the longer your loan term, the longer you’re on the hook for a car if something unexpected happens to you and your family.
My biggest piece of car-buying advice always used to be “Don’t ever buy above your budget,” meaning that above all else you should make sure you get something you can actually afford. But let’s be real: That’s gotten pretty squirrely in recent years, with new (and then used) car prices being all over the map. Sometimes you have more kids and need something bigger. Sometimes your current ride has too many problems you’re sick of paying to fix, and it’s time to move on. Stuff happens, is what I’m saying. Lately, it’s just not that easy to figure all this out.
Amid all this Economic Uncertainty® and rampant layoffs across multiple sectors, people’s financial situations can change rapidly, but deep debt isn’t going anywhere. In fact, it’s getting worse, and those high prices are quite the trap:
In January, severely delinquent auto loans hit their highest rate since 2006, based on Cox Automotive data.
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.
So what actual advice can I offer people right now, who may be facing this situation? I’m not so sure. It’s a bizarre car market and I don’t think it will normalize all that much in 2023, and again, I try not to judge people’s situations when our systems are designed to trap users in debt.
However, I can say that generally, negative equity should almost always be avoided, especially if it’s anything more than a few thousand dollars (and even then we’d probably agree that isn’t great.) If you can hold off on making a car purchase you really don’t need, or want to pay down what you have in the meantime, that’s the best path. And as always, start the car-buying process with what you can actually afford and work back from there.
At least these increasingly automated cars can’t repossess themselves yet if buyers fall behind on payments. Oh, wait. Shit.
What’s your car-buying advice to your friends, family and associates in 2023? If you’re reading this site, I bet you’ve been asked that. Share your wisdom with the Autopian crowd, if you’re so inclined.