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Negative vehicle equity on the rise: debt hits new record
Colin Velez
July 12, 2024
Nearly a quarter of new car buyers who traded in their old vehicle had negative equity in the second quarter, a three-year high that underscores the rapid depreciation of used car prices.
Why this matters: Negative equity limits a customer’s options when shopping for a new vehicle, leading them to either settle for more affordable options or hold off on a purchase until their debt is paid. While there was a period when used car values were on the rise, the pendulum is now swinging back toward a more normal state, leaving owners who purchased during the pricing peak in deeper water.
Here’s a bird’s eye view of the trade-in landscape:
According to Edmunds, 23.9% of new car purchases involving a trade-in had negative equity in Q2. This is the biggest number since Q2 2021, when 31.9% of buyers were upside down on their loan. However, this is only slightly higher than Q1 2024, when negative equity accounted for 23.1% of trade-ins.
While the number of borrowers facing negative equity is far from the peak, the amount of debt being carried by these buyers is greater than ever before. Car owners with upside-down loans owed an average of $6,255 last quarter, a new record. While debt levels trended downward leading up to 2022, they have risen so rapidly in the years since that typical amount owed in Q2 2024 is nearly $1,000 higher than in Q2 2019 ($5,317).
Vehicle age is also creeping back up, effectively reaching parity pre-pandemic norms. The average trade-in car age during Q2 was 3.7 years, up from 3.4 in 2023. In 2019, the number was 3.8.
The EV anomaly: One interesting takeaway from Edmunds’ data was the difference in debt between gas-powered and electric vehicle owners. Buyers who traded in an EV in Q2 owed $10,326 on their loan, almost $4,000 more than the average and almost double the levels seen two years ago. Electric car owners are also trading in their models much faster than others. The average EV age among trade-ins was only 2.1 years.
“Negative equity only becomes a problem when you trade in a vehicle too soon. If you’re worried about being underwater on your current car loan, your best bet is to keep your vehicle as long as possible and keep up with regular maintenance.”
Bottom line: This increase in negative equity was predictable, even back in 2021 when used car prices were starting to skyrocket. But while a correction was unavoidable, it sheds light on an unfortunate reality: even though some conditions in the car market are improving, other factors are putting downward pressure on demand, preventing a much-needed uptick in sales. This means that a true recovery will hinge on more than pricing and availability. Dealers will need to keep a close on all variables if they hope to prepare for the market’s future.
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