Negative equity spikes in Q3, EV owners hit hardest

Negative equity is becoming more and more common among car buyers, raising red flags for dealers in the coming months.

Driving the news: Incentives, subsidized interest rate cuts, and new model launches are bringing customers back to the dealership after years of waiting for more favorable market conditions. Unfortunately, a worryingly high percentage of these incoming buyers won’t be able to cover their current car’s outstanding loan balance through a sale or trade-in alone.

• The portion of auto loans with negative equity is now at 31% according to a Q3 survey of car owners conducted by CarEdge.

• That represents a sharp increase from earlier this year. While looking exclusively at trade-ins, Edmunds recorded a share of 23.9% in Q2. The last time the firm tracked negative equity levels higher than 30% was in Q1 2021.

Zooming in: While overall levels appear to be rising, depreciation and negative equity are affecting buyers in certain groups much more than others.

• Owners of newer models are in especially bad shape. Car prices have declined slowly but surely since hitting their peak of $49,929 in late 2022. Thirty-nine percent of those who purchased in the two years since are underwater on their loan, much higher than the average of 31%.

• Longer loan terms, which many accepted to afford the inflated price of their vehicle, also run a greater risk of falling underwater. According to CarEdge’s survey, drivers with an 84-month term have a median equity of -$4,920 compared to the $2,085 among those that agreed to 72 months.

• Electric vehicle buyers are among the most likely to see high levels of negative equity. A staggering 46% of EV owners in CarEdge’s study were underwater on their loans. Plus, of the 16 brands included in the study, Tesla owners had the lowest median equity at -$1,718, compared to $8,166 among Toyota owners.

Bottom line: With negative equity on the rise, retailers must be ready to navigate difficult conversations in the dealership. Consumers currently underwater on their loans are also likely to wait on their next purchase to avoid rolling their balance into a new loan, complicating sales forecasts for the coming months. But whenever they do decide to purchase, knowing which customers are being hit hardest by depreciation can help sales staff manage expectations and direct clients to the best-suited option.

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