A recent CFPB report suggests that incorporating negative equity into new car loans may be a risky practice. (iStock)
According to a recent study by the Consumer Financial Protection Bureau (CFPB), drivers with negative balances on their auto loans are twice as likely to have their accounts foreclosed, and they also have lower incomes and credit scores. investigation Said.
Negative equity, or the inability to repay an auto loan, means that the borrower owes more on the loan than the car is worth. The risk for the consumer is that they will have to make up the negative equity with a new loan when they want to buy a new car, or they will have to keep their current car for longer. When we looked at new and used car loan data from 2018 to 2022, we found that about 11.6% of consumers took negative equity from an existing loan into a new loan. The average negative equity amount on the loan was $5,073 for new car financing transactions and $3,284 for used car financing transactions.
a Separate Report According to Edmunds, by the first quarter of 2024, vehicle sales with negative trade-ins will increase to 23.1%, with the average negative equity hitting a record high of $6,167. These loans are more expensive, with higher monthly payments and interest rates, than deals with positive equity or no trade-in.
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“This meant that consumers who purchased new or used vehicles at or near the market’s peak saw their vehicles rapidly decline in value,” the CFPB said.
Additionally, the study found that borrowers with negative debt balances had an average credit score of 704, compared to 752 for borrowers with positive trade-in balances and 732 for consumers with no trade-in balances associated with their accounts. Additionally, these consumers have higher payment-to-income ratios and are less likely to be able to handle a financial shock.
If you’re looking to save money on your car, consider switching car insurance companies to lower your monthly rates. Visit Credible to comparison shop and find the right rates for you without affecting your credit score.
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Loan APRs continue to rise
According to a report from Edmunds, the average annual percentage rate (APR) for used-car loans rose above 7% for the fifth consecutive quarter in the first quarter of 2024. Used-car APRs rose 0.1% from the previous quarter to 11.7%.
The average monthly amount drivers paid to buy a new car was $735, just $4 lower than the previous quarter. Monthly payments for used cars fell to $546, down from $561 last quarter and $551 a year ago. But car owners who decided to roll over the outstanding balance on an existing auto loan toward a new car purchase are spending more: the average monthly payment for a new car, including a trade-in, was $887. These drivers also received a higher average APR at 8.1%.
“Attractive new product launches, the reintroduction of incentives and a recovery in inventory in the new-vehicle market are all positive signs for shoppers, but rising interest rates are dampening the market’s positive momentum,” said Jessica Caldwell, Edmunds’ head of insights. “The resurgence of negative equity is further exacerbating buying difficulties, as consumers who regretted their pandemic purchases are facing lower-than-expected vehicle prices when they return to dealerships to make their new-car purchases.”
If you’re looking for new auto insurance, you can use the Credible marketplace to compare multiple providers and find a customized rate in minutes, without impacting your credit score.
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Tips for avoiding negative equity
Most vehicles are considered depreciating assets, so many consumers are accustomed to negative equity regardless of the economic environment. However, the rapid decline in prices and normal depreciation have increased the risk of negative equity.
Consumers who buy a car at a premium price have the option of making a larger down payment and borrowing less to avoid a negative situation. Another option for consumers is to hold onto the car longer rather than trading it in or selling it until they are within the repayments of their loan.
“While the monthly payment may be acceptable, it’s important for consumers to consider all the elements of a loan when buying a car in 2024,” says Ivan Drury, Edmunds’ director of insights. “And once you’ve taken out a loan, avoid the temptation to trade in that vehicle too soon.”
“Factors like gas prices, car maintenance costs and changes in commute times may seem like reasons to trade in the keys for a shiny new car, but paying a costly new car loan with a high interest rate combined with existing debt should be enough to dissuade you from making a purchase,” Drury continued.
If you are struggling with rising car prices and want to save money, consider looking for a new car insurance company to lower your monthly premiums. Visit Credible to compare multiple car insurance companies at once and choose the one with the best rates.
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