Consumers looking to buy new cars don’t have much stopping them, thanks to easy credit and longer loan durations. But being able to buy a new car doesn’t necessarily mean it’s a great investment.
Through the first three quarters of 2016, an estimated 32 percent of all trade-ins toward new vehicle purchases were worth less than the amounts remaining on the loan, according to research done by Edmunds.com. That rate of negative equity is the highest on record, up from 30 percent of all trade-ins toward new vehicle purchases from the first three quarters of last year.
Such shoppers are considered “underwater,” and their amount of negative equity is at record-highs as well. Through the first nine months of 2016, the average trade-in has been worth $4,832 less than the current value of the loan.
That remaining difference — between the vehicle’s value and the amount remaining on the loan — must be added to the price of the vehicle the shopper wants to buy.
The “underwater” percentage’s previous high was 29.2 percent in 2006, just before the housing market bubble burst. The lowest the percentage has been was 13.9 percent in 2009, the heart of the economic recession.
So why are so many shoppers willing to pay the difference — between the trade-in value and the balance on the loan — on top of the price of a new car?
“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said in the report. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle. In fact, shoppers with this mindset may want to consider jumping on the leasing bandwagon. They can get into a new car with great technology every few years without having to worry about how much they still owe on their trade-in.”
The average monthly payment on a new vehicle purchase in Q3 was $505 — according to Edmunds — which is $77 higher than the $428 average monthly lease payment. The numbers also show that leasing accounted for an estimated 33 percent of new car transactions through October.
But this trend isn’t specific to people who want to drive brand-new cars.
Edmunds also found that 25 percent of all trade-ins toward a used car purchase in Q3 had negative equity, a record high. The shoppers making up that percentage had an average of $3,635 of negative equity when they decided to trade in, also a Q3 record.
Thumbnail photo via Ford