Car ownership in America is facing a major financial crisis, with a significant portion of drivers finding themselves in debt greater than the value of their vehicles. A recent survey conducted by CarEdge in collaboration with Black Book revealed some troubling statistics about the state of automotive debt in the country.
According to the survey results, 31% of drivers who financed their vehicles are currently experiencing negative equity. This number rises to 39% for vehicles purchased since 2022, indicating that newer car buyers are at a higher risk of being underwater on their loans. The increasing prices of vehicles and the prevalence of long loan terms are contributing to a higher likelihood of negative equity for car owners.
Interestingly, electric vehicle (EV) owners are facing an even more challenging situation, with 46% of them currently in negative equity. The median loan-to-value ratio for EV owners is 0.94, higher than the market average of 0.73. Luxury car brands like Tesla and BMW are also seeing higher rates of negative equity compared to more budget-friendly brands like Toyota and Honda.
The survey also highlighted the impact of loan terms on a vehicle’s equity. Car owners with 84-month loan terms are, on average, $5,000 underwater, while those with 36-month loans typically have around $12,340 in equity. Although longer loan terms may reduce monthly payments, they increase the risk of negative equity in the long run.
One concerning trend identified in the survey is that a large number of drivers are overestimating the value of their vehicles. 61% of respondents believe their cars are worth more than their actual trade-in value, with 17% estimating their cars to be at least $5,000 more valuable. This overestimation can lead to buyers rolling over negative equity into their next car loan, perpetuating the cycle of debt.
The average price of a new car in the US is currently over $48,000, making it challenging for consumers to stay within their budget when purchasing a vehicle. While there are more affordable options available, such as buying used cars, the allure of new cars and the desire for the latest features often lead buyers to exceed their financial limits.
As the automotive debt problem continues to grow, it raises concerns about the sustainability of the current trend. With a significant portion of drivers in negative equity and overestimating the value of their vehicles, there is a risk of a potential financial bubble burst in the future. Finding a balance between affordability and vehicle features is crucial for consumers to avoid falling into the trap of automotive debt.
