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 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,” said Martin, a 36-year-old data engineer.
The build-up in negative equity — or the amount that debt exceeds a vehicle’s value — is rattling consumers and raising alarms within the industry. Though it’s not unusual for drivers to carry negative equity, some dealers say more people are arriving at their lots up to $10,000 underwater, or “upside down,” on their trade-ins. They’re buying at still-sky-high prices and rolling debt from one car to another and even onto a third. Loans are commonly stretching to seven years.
“As trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity,” said Ivan Drury, director of insights at auto-market researcher Edmunds. “Unless American car shoppers break their habit of buying again too soon, we’ll see the negative equity tide continue to rise.”
Even if the US economy avoids a recession this year, consumers will likely struggle to make payments on their auto loans, 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 still elevated, demand high and inventory levels relatively low, Ford Motor Co., General Motors Co. and other automakers continue to rake in sizable profits.