While the price of new cars continues to soar, and the average monthly car payment heading toward $800, while the number of car payments exceeding $1,000 is higher than it has been in a decade, Millennials and Zoomers are beginning to skip their car payments. However car sales are not trailing off as the rate of delinquencies increases, meaning the situation may be worsening.
Now Bloomberg is reporting that the number of Americans severely upside-down on their auto loans is at a record level. The outlet reports that the situation is growing increasingly concerning to everyone involved, from the car owners to the dealers.
Dealers are reporting record numbers of buyers who are showing up with $10,000 or more in negative equity, who want to trade in their vehicle, and then roll the debt into a new loan.
Bloomberg interviewed one owner who said that when his family realized they needed a bigger vehicle, they traded in both of their cars to purchase a new Ford Explorer. After factoring in what was owed on the two cars, plus the registration and other dealer fees, the individual ended up having paid $66,000 for a new $49,000 Explorer.
Bloomberg noted that family was not an isolated case, either. The average amount owed on an auto-loan in America is rapidly approaching pre-pandemic levels, according to data from Edmunds. From April to December of 2021, the average amount Americans owed on car loans was below $5,000. However by the end of 2022, the average amount had begun to climb once again, reaching $5,500. As prices of vehicles continue to rise, and loan terms grow longer, those in the industry see even more reason to worry.
However experts note that the degree of the problem also depends on the buyer base. The general manager of a dealership group in Falls Church, Virginia, Pete Kesterson, says he worries about his Kia customers more than his Volvo customers.
He noted that his Volvo customers usually pay cash when purchasing a vehicle, while Kia customers more often finance their purchases. While he noted sales were up, he worried that it all might end up being an indicator of deeper economic problems which may emerge as time goes on.
He said to Bloomberg, “It’s going to come, and it’s going to bite us. Now, we’re selling the cars for so much more, and financing for longer, at a much higher interest rate. There are some challenges coming down the pike.”
However the report noted the situation was not entirely the fault of the buyers. The resale value on some models and brands is simply terrible, and the buyer has no control over that. Other factors can come into play as well. Lenders typically will not approve of a dealer markup which is greater than the value of the vehicle, and buyers have no control over that.
The report concluded that presently the entire industry is on the path toward the auto loan bubble popping, and it is no longer a question of if it will, but rather it is a question of when it will.
