Negative equity and delinquencies cast a shadow on auto lending

The auto finance market settled into a more stable state during Q3. Monthly payments held steady, and leasing boomed, but the undercurrent of debt tells a more complicated story. Rising delinquencies, surging loan-to-value (LTV) ratios, and affordability challenges have left many borrowers treading water.

By the numbers:

• New car payments averaged $745 — up just 0.3% year-over-year. And used car payments dipped to $526, reports TransUnion.

• Meanwhile, more than half of used car loans now carry loan-to-value ratios (LTVs ) above 120%. That means borrowers owe 20% more than their vehicle is worth. This problem has doubled in size since 2021, driven by pandemic-era pricing that forced buyers to pay top dollar for cars that have since depreciated substantially.

• And the average trade-in with negative equity now sits at a record $6,458, according to Edmunds.

At the same time, delinquencies are creeping into dangerous territory. 

• Already strained subprime borrowers saw serious delinquencies (60+ days late) rise to 6.23% in Oct., the highest level since the Great Financial Crisis. Even prime borrowers are falling behind, a sign that inflation and stagnant wages are straining household budgets across the board.

• Rising delinquencies mean higher costs for lenders when servicing loans and chasing down missed payments. It also means setting aside more reserves to cover potential losses.

The good news: Leasing now accounts for 25% of new vehicle registrations, up from just 17% two years ago. And for EVs, leasing is leading the way, with nearly 80% of new EVs leased from dealerships.

Why the surge? Automakers are throwing everything they’ve got at leasing to make it attractive — including dealer incentives, discounts, and federal tax credits that cover an average of 13.7% of EV transaction prices, per Cox Auto.

• For consumers, leasing offers a way to bypass sky-high sticker prices and lock in lower monthly payments.

• For automakers and dealers, it’s a tool to keep inventory moving and make EVs more accessible without slashing MSRPs.

• But leasing isn’t a cure-all. It helps some buyers sidestep affordability issues, but it doesn’t address the deeper problem: vehicles remain out of reach for many consumers.

The bottom line: Without addressing the rising debt and negative equity that’s trapping buyers, the market risks deepening the divide between those who can afford to participate and those who can’t.

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