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Repo rate ticks up for consumers with negative equity trade-ins

Repo rate ticks up for consumers with negative equity trade-ins

Colin Velez
June 28, 2024

Auto loans involving a negative equity trade-in are nearly three times more likely to end in repossession than an auto loan involving a positive equity trade-in, according to data from the Consumer Financial Protection Bureau.

What this means: Many vehicle owners are facing negative equity after car prices plummeted from their peak in 2022. Although some buyers are still trading in models with positive rather than negative equity, with a host of other financial challenges adding to the burden consumers face, it’s little surprise that lenders are showing increased caution in today’s market.

Equity trends

In loans that included negative equity in financing, the average amount of negative equity totaled $5,073 for new vehicles and $3,284 for used vehicles in 2023.
Around 4.3% of auto loans involving a negative equity trade-in resulted in repossession after two years, based on data from 2023. That’s roughly three times the number for positive equity trade-ins, which hovers around 1.3%.
Captive lenders continue to issue loans with more negative equity, averaging around $5,500.
Buyers who financed negative equity were typically worse off financially than others. The average credit score for these consumers was 704 in 2023, whereas positive equity trade-ins were associated with scores of 752. Negative equity is also associated with longer loan terms.
On the other hand, negative equity is still less common than it was before the pandemic, as car values remain relatively high. At the same time, the overall amount of negative equity is at an all-time high.

Bottom line: Negative equity is slowly becoming more common, making a bigger and bigger impact on consumer finances as it grows more prevalent. Assuming this continues, lenders are likely to show more selectiveness in who they approve for loans, potentially blocking some buyers from the market.

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Repo rate ticks up for consumers with negative equity trade-ins

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