- Analysts warn that current car buyers are at risk of their auto loans collapsing.
- Financing costs are rising as cars depreciate.
- “We are only seeing the tip of the negative equities iceberg,” said Edmonds analyst Ivan Drury.
If you recently took out a loan to buy a car, especially a Tesla, you will soon be paying more than the car is worth.
According to Edmunds, which tracks car inventory and information, in the last three months of 2022, nearly 16% of consumers who funded new cars and 5.4% of consumers who funded used cars , promised to pay at least $1,000 per month. Both figures are the highest ever.
Your payments are increasing because your car is depreciating in value. This means that even if the car is no longer worth it, the consumer still has to pay the original balance of the loan, and interest rates are now higher. Used car prices in December fell 2.5 percent from November, while new car prices fell 0.1 percent, according to the Bureau of Labor Statistics.
This is classic “negative capital”, a situation where the assets used to secure the loan are worth less than the outstanding balance of the loan. The scenario, also called “underwater” or “upside down”, is bad for the debtor. If you can’t pay, you won’t be able to sell your assets and raise enough money to get out of debt. Lenders are likely to foreclose on cars, drivers are forced to pay their monthly debts, and they have no cars to drive.
“We are only seeing the tip of the negative stock iceberg,” said Ivan Drury, director of insights at Edmonds, as he expects auto prices, especially used car prices, to continue to fall.
Tesla Buyers Beware
To boost sales, Tesla last week made a surprise announcement that it would cut U.S. prices for some versions of its best-selling Model Y SUV by about 20%, while the Model 3’s base price was the cheapest model, about 6%. The price cut will increase the number of vehicles eligible for the electric vehicle tax credit under the Inflation Control Act.
The move was immediately drawn backlash on twitter From someone who has purchased an expensive car in the past year. Not only did the price cuts drop the value of all new and used Tesla cars across the board, but it also forced people to repay their loans at a higher value.
“If you just bought it, you’re probably going to get upset and flip over,” says Drury. “The ceiling is new car prices, and the ceiling just collapsed.”
Automobile prices have been high over the last two years as supply chain disruptions have hampered the launch of new vehicles. These high car values and low interest rates allowed people to use their positive capital in loans and leases to buy even more expensive cars. Positive capital means you made enough money to pay off your debt if you sold the car.
“For a while, you buy a car that has gone up in value, use it, sell it for more than the original price, make a profit, drive it for free,” said Martin Ellingsworth, executive managing director of P&C insurance intelligence at JD Power. There were people too.
“However, as we move into an environment of declining used-car values and rising interest rates over the past few months, consumers have become less insulated from risky loan decisions,” Drury said. increase.
- Suppose you loan $30,000 over 60 months at an interest rate of 4% in 2021. By the end of his first year, about $24,000 remains to be paid. So even if your car’s value drops to $27,000, your net worth could be positive.
- This is in contrast to last month’s $30,000 loan at 7% over 60 months, when the car could have fallen thousands of dollars in value. Two months later and still over $29,000 in debt, it’s already submerged.
Of course, if interest rates continue to rise, the economy slows, and inflation falls, as economists predict, cars will fall in value even more, drowning more loans, said J.D. Power’s auto finance chief. said director Patrick Rosenberg.
“When sales slow down, dealers and manufacturers will offer rebates to motivate them,” he said.
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In the fourth quarter from October to the end of December, 17% of new car sales with trade-ins were negative capital compared to 15% in the fourth quarter of 2021 and 32% in the fourth quarter of 2020 . Said. Meanwhile, average debt on upside down loans rose to $5,341 from $4,141 in the fourth quarter of 2021 and $5,059 in the final quarter of 2020.
“Dealers who traded in in November and December have also been hit,” Drury said. “They have money that no longer exists.”
what can you do
As with housing, you can consider refinancing, but given that interest rates are rising, it may not make much sense.
Drury says that if you already have a car and have a large loan, the best thing to do is keep it as long as you can. “Drive until the wheels fall off,” he said.
Negative stocks “will not be a problem until the next trade,” he said. “At some point, you’ll have positive equity.” That’s usually toward the end of the loan term when you’ve paid enough interest and principal to offset the initial depreciation of the car. .
If you haven’t bought a car yet and don’t need it right away, wait. Most analysts expect auto prices to continue to fall as the Federal Reserve raises short-term federal funds rates to make borrowing more expensive, slowing spending and inflation.
Although the Fed does not control consumer rates, the impact of Fed rate hikes ripples through the economy, and consumer rates typically follow. That said, interest rates are likely to stop rising this year and remain high.
Drury said this year is “back to normal”. “People never pay more than his MSRP (manufacturer’s suggested retail price). Manufacturers offer cashback and leasing deals.”
How to find the best car loan interest rates if you need to buy a car
Life changes may require you to buy a car immediately, or you may really want one now. If you can’t wait, here are some things to consider to get the best rates.
- Look for the best financing deals your credit score can get you. Your credit score affects the rates a lender can offer.
- Consider adding signers who are more trusted than you.
- Put more money into your purchases to offset rising costs. Edmunds said average down payments for new and used cars hit record highs in the fourth quarter, reaching $6,780 and $3,921 respectively.
- Pay back with reasonable repayment period. Monthly payments may be less for longer terms, but you may end up paying more overall.
Medora Lee is a money, markets and personal finance reporter for USA TODAY. You can contact her at firstname.lastname@example.org and subscribe to her free Daily Her Money newsletter where you can get personal her finance tips and news about her business every Monday through Friday morning.