Negative-equity levels are at record highs as lengthening loan terms, rising transaction prices and falling used-vehicle values combine to take a toll on consumers and the industry.
In the first quarter of 2017, the percentage of trade-ins on new-vehicle sales that had negative equity reached a record 32.8 percent. The average amount of negative equity, at $5,195, was also a high, Edmunds data show.
Average negative-equity amounts have exceeded $4,000 on average since the third quarter of 2013. The higher levels came as the economy recovered after the recession, according to Ivan Drury, Edmunds' senior manager of analytics development.
From 2009-11, negative equity fell "simply because people couldn't get a new-car loan," Drury said. As vehicle financing dried up during the downturn, many consumers were forced to hold onto their vehicles, so they paid down more of their balance. "When they finally went to the dealership," he said, "they didn't owe nearly as much."
Now that most consumers have recovered from the recession, they are more likely to trade in their vehicles earlier, often before their loan terms expire. The practice contributes to higher amounts of negative equity.
Consumers are stretching their loan terms as they strive for the lowest possible monthly payment. The average new-vehicle loan term in the first quarter was 69 months, up five months from the first quarter of 2011, Edmunds data show.
Longer term loans
Consumers are lengthening their loan terms on new-car purchases to keep payments affordable as prices rise.
First qtr.
Avg. loan term (mos.)
Avg. payment
Avg. transaction price
2010
63.3
$479
$29,297
2011
63.6
$458
$29,824
2012
64.6
$463
$30,108
2013
65.7
$463
$31,166
2014
66.3
$474
$31,886
2015
67.5
$491
$32,821
2016
68.6
$503
$33,506
2017
69
$512
$34,802
Source: Edmunds
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'Vicious cycle'