As the cost of new cars continues its steady climb each year, longer loan terms coupled with increasing monthly payments have resulted in a widespread issue of individuals owing more on their loans than their vehicles are worth.
Now, the situation is further complicated by a decline in used car prices, leaving many with trade-ins that fetch even less than anticipated.
A recent study conducted by Edmunds examined the correlation between used car prices and negative equity in trades, revealing a notable increase in the latter due to a decrease in the former. This trend, according to the report, follows the natural progression from the surge in used car sales observed during the lockdown period.
Ivan Drury, Director of Insights at Edmunds, highlighted this shift, stating, “A storm is brewing in the used market as incentives and inventory continue to trickle back into the new vehicle market.” He further emphasized the resurgence of negative equity in trade-ins, particularly for newer vehicles, as depreciation takes its toll.
Drury explained, “During the last few years, consumers could jump into new car loans and their trade-ins were shielded from negative equity because some dealers, desperate for used inventory, were willing to pay near original purchase prices.”
However, with the recent downturn in the used car market, consumers must exercise caution, especially when trading in newer vehicles, as they are most susceptible to depreciation.
While the decline in used car values spells trouble for new car buyers, Edmunds analysts also highlight challenges for budget-conscious consumers.
Despite significant discounts available for luxury and large mainstream SUVs, Joseph Yoon, Consumer Insights Analyst at Edmunds, cautioned, “Unfortunately, the most price-sensitive consumers seeking affordable transportation will have a much harder time finding discounts because the supply of older used vehicles is still pretty restricted.”
The current market dynamics indicate that substantial savings are attainable for buyers willing to invest in high-end vehicles. However, for those seeking more affordable options, navigating the limited availability and diminishing discounts remains a daunting task.
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