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In 2017, about one-third of all vehicle trade-ins were underwater, an increasing trend in the U.S.
When consumers bought new cars in 2017, approximately 43.5 percent brought trade-ins with them for the deal. Out of those trade-ins, roughly one-third were underwater, which is continuing a recent troubling trend. The number of underwater trade-ins has been ticking up since the beginning of The Great Recession. About a decade ago, only 13.9 percent of automobile trade-in loans were underwater.
An underwater trade-in refers to a used car whose market value is lower than the current auto loan balance on that vehicle. In other words, the car depreciated in value faster than the original auto loan was paid off before the trade-in.
What Happened in 2017 With Auto Loans?
It wasn’t a great year in 2017 for automobile sales. But even though sales didn’t increase, the automobile loan industry prospered because less desirable borrowers were given loans.
According to recent data, the proportion of subprime auto loan borrowers has been increasing in the market. On that note, over 6 million Americans were at least 90 days late on an auto loan. Furthermore, borrowers were taking out riskier, long-term car loans in greater numbers.
These developments led some industry experts to draw parallels with the housing bubble from a decade prior.
Will It Improve?
Problems with trade-ins and auto loans will most likely not go away. Only 14 percent of the new cars bought in 2017 were bought outright without financing.
The reason that information is promising is because people with subprime and deep subprime credit ratings don’t generally land the lowest auto loan rates. A higher interest rate can affect just how deeply underwater a borrower will be when they decide to trade in their vehicle.
What Can People Do To Avoid Being Underwater on a Vehicle?
People should shop around for the most competitive interest rate they can find. Plus, they should try to put a down payment on the car, as much as they can afford.
Finally, taking a shorter loan term and keeping the car until it’s fully paid off will eliminate the problem of underwater trade-ins.
In his role at LendEDU, Mike uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.