Summary
- 31% of American drivers who financed their cars are underwater on their loans
- 46% of electric vehicle owners have negative equity in their cars
- Over half of drivers overestimate their vehicle’s value
- Longer loan terms increase the likelihood of negative equity
- Many people overestimate the value of their cars, leading to more negative equity rollovers in future loans
Article
A recent survey conducted by CarEdge in partnership with Black Book revealed that 31 percent of American drivers who financed their cars are currently underwater on their loans. This percentage increases to 39 percent for vehicles purchased since 2022, indicating that newer car buyers are especially vulnerable. Electric vehicle owners are even more likely to have negative equity, with 46 percent of EV owners surveyed in a negative equity position. Luxury car brands like Tesla and BMW also show higher rates of negative equity compared to budget brands like Toyota and Honda. The median loan-to-value ratio for EV owners is 0.94, higher than the broader market’s 0.73.
CarEdge also found that longer loan terms directly impact a vehicle’s equity, with car owners with 84-month loan terms being around $5,000 underwater on average. In contrast, buyers with a 36-month loan typically have around $12,340 in equity. While longer loans may reduce monthly payments, they increase the risk of negative equity in the long run. Additionally, 61 percent of the surveyed individuals overestimated the value of their cars, with 17 percent believing their cars are worth at least $5,000 more than their true trade-in value. This overestimation can lead to more buyers rolling over negative equity into their next car loan, perpetuating the cycle of financial trouble.
With the average price of a new car exceeding $48,000, many people are going above their means to purchase vehicles. While there are cheaper options available, such as buying used cars, the high cost of new cars makes it challenging for individuals to stay within their means. This financial strain, combined with the prevalence of negative equity and overestimation of car values, indicates a brewing crisis in the automotive industry. The survey results highlight the urgent need for consumers to make informed financial decisions when purchasing cars to avoid falling into further debt.
The survey also revealed that only 39% of vehicle financing options are currently underwater. This number is likely to increase as vehicle prices rise and longer loan terms become more common. As such, it is imperative for buyers to consider the implications of their financing decisions and prioritize financial stability when purchasing a car. The trend of overestimating car values further exacerbates the issue, leading to higher instances of negative equity and financial turmoil for car owners. To address these challenges, consumers should seek financial guidance and education to make more informed decisions regarding their car purchases and financing options. By taking proactive measures to avoid negative equity and overestimation of car values, individuals can safeguard their financial well-being and avoid the pitfalls of the automotive debt crisis.
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