The Great Auto Loan Flip: Americans Feeling the Squeeze as Used Car Values Dip
The rollercoaster ride of used car prices is finally taking a dip after years of soaring to unprecedented heights post-pandemic. This shift brings a sigh of relief to potential buyers but spells trouble for those who recently bought vehicles at peak prices. Edmunds’ latest report unveils a concerning trend where more Americans are finding themselves upside down on their auto loans as used car prices soften. The average amount of negative equity consumers are grappling with is now at an all-time high.
According to the report, the average transaction price for used vehicles decreased to $28,371 in the fourth quarter of 2023, marking a 4.4% drop from the previous year’s figure of $29,690. Simultaneously, the percentage of new vehicle sales that involved trade-ins with negative equity surged to 20.4%, a significant increase from 17.7% in 2022 and 14.9% in 2021. The average debt on upside-down loans has skyrocketed to a record $6,064, painting a grim picture for many consumers.
Ivan Drury, the director of insights at Edmunds, aptly described the current scenario as a brewing storm in the used car market. With incentives and inventory slowly returning to the new vehicle sector, the demand for nearly new vehicles is dwindling, leading to a depreciation trend reminiscent of pre-pandemic times. The repercussion of this shift is the resurgence of negative equity, which poses a significant challenge for many individuals.
Analysts at Edmunds pinpoint those who purchased new vehicles above the sticker price as the most vulnerable group to falling underwater on their auto loans. These consumers are experiencing the sharpest declines in their vehicles’ value, especially as compared to the peak values witnessed in the third quarter of 2022. The average transaction price for 1-year-old vehicles saw a substantial drop of $6,763 to $38,720 in the last quarter, reflecting the challenges faced by recent buyers.
In this evolving landscape, consumers are urged to exercise caution, particularly when trading in newer vehicles. The days of dealers paying near original purchase prices are fading away, emphasizing the importance of diligent decision-making. As the used car market adjusts to the changing dynamics, buyers and sellers alike must navigate these fluctuations with prudence to mitigate the risks associated with negative equity and depreciating vehicle values.
