Nearly three-quarters of loan applicants were approved for car loans in June. But behind those approvals were more troubling figures on negative equity, according to industry data from Cox Automotive and Edmunds.
Digging in: After falling to just under 70% in February, auto finance approvals continued to climb in June to 73.8%, according to Cox Automotive.
The rise was 170 basis points from May and is up 150 points year-over-year.
Loan terms continued to be stretched out, with a record 31.1% now more than 72 months.
Down payments trended down in June to 13.2%.
“The rebound happened even though applications stayed flat. More of those applicants had prime and near-prime credit, lenders eased up somewhat on stronger-credit borrowers, and deep subprime's share of approvals declined slightly.”
Scott Vanner
Cox Automotive
Manager of Economic and Industry Insights
“The share of loans with terms greater than 72 months hit a new all-time high in June. That's not a statement about the risk itself getting worse; it's about scale: more loans than ever now carry that risk,” Vanner told CDG News, adding, “It also means more borrowers spend more of the loan underwater on the vehicle's value. If they decide to trade in before the term is up, they're more likely to still owe more than the car is worth, so they either roll that negative equity into their next loan rather than starting clean, or stay in the vehicle longer than they would have otherwise.”
Underwater loans grow: Negative equity is already an issue for today’s consumers returning to the market.
Edmunds data shows that 29.6% of trade-ins toward new-vehicle purchases had negative equity on average of $6,884.
This negative equity added to the loan is pushing the average payment to $944 per month.
Edmunds Director of Insights Ivan Drury told CDG News some of the current negative equity on trade-ins can be traced back to purchases made in 2022, when few incentives were being offered as vehicles were in short supply.
“The conditions of purchasing back in 2022, compared to today, it's a different environment altogether.”
Ivan Drury
Edmunds
Director of Insights
What he means: “It's not like we have massive incentives today, but we have more incentives for sure. Inventory's up, and depreciation has come back to some degree,” he continued.
“If you're someone who bought in 2022, and you came back to the dealership expecting a similar experience, especially if you thought your trade-in was gonna be just as valuable as back in 2022, that's not the case.”
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Not record negative equity: Drury noted that the percentage of negative equity on trade-ins is lower than pre-pandemic numbers when 34.6% of trade-ins were upside down.
But what has changed is the average amount and the fact that even older models have more negative equity.
The average age of vehicles with negative equity hit a second-quarter record of 4 years.
Drury said that seeing historically safe residual-value bets now underwater is a sign of a financing issue.
Looking ahead: Longer terms and negative equity issues are expected to hold as consumers look to stretch out payments into a range they are comfortable with, according to Vanner.
Drury, on a similar note, noted that leasing may be the answer for some consumers rather than adding $7,000 to another loan.
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