Bloomberg by Claire Ballentine 12/16/2023
Negative equity on automobiles is at the highest level in more than three years, with higher prices and borrowing costs hitting owners.
It’s a tough time to be a car owner in the US.
Prices for new vehicles are high. Interest rate hikes have made loans more expensive. And many car owners now owe more on their loans than their vehicle is worth. This situation — commonly called being “underwater” or having “negative equity” — occurs when the price of a car falls faster than the owner can pay down the loan for it.
In November, people with negative equity were underwater by an average of $6,054, the most since April 2020 and well above pre-pandemic averages, according to automotive information firm Edmunds.com Inc. It’s a precarious spot for many Americans, coming after a twin surge in car buying and interest rates has strained finances and fueled an uptick in automobile repossessions.
“We're in this situation where combined with the cost of the vehicles being so high and the interest rates being so historically high, you have a lot of people who are in bad car loans,” said Joseph Yoon, consumer insights analyst for Edmunds.
Troubling SignNew cars lose value as soon as they’re driven off lot, so being underwater is not uncommon. Still, the recent surge in negative equity is a troubling sign in a US economy that has mostly proved resilient in the face of inflation-taming rate hikes. Repossessions have ticked higher, with car owners falling behind on their payments at the highest rate in three decades. And as the Federal Reserve ponders when to start cutting rates, stress in the car market is a window into the financial struggles of everyday Americans who are having a hard time making ends meet.
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