A growing number of U.S. auto shoppers have negative equity – underwater in industry terms – on their trade-ins when they’re purchasing their next vehicle. Per Edmunds data, an estimated 32% of all trade-ins toward the purchase of a new vehicle through Q3 of 2016 were underwater.
This is the highest rate on record, and it’s up from 30% of all trade-ins toward new car purchases from January to September last year. These “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.
“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” says Edmunds.com Sr. Analyst Ivan Drury. “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.”
To give an idea of how much these short-term shoppers can potentially save by switching to leasing, Edmunds found that the difference between the average monthly payment on a new car purchase ($505) was $77 more than the average monthly lease payment ($428) in the third quarter. In general, new car leasing is at its highest level ever. Leasing made up an estimated 33% of new car transactions in 2016, through October. However, going down this leasing road, likely means car payments for the rest of the life of the lessee since they are building no equity.
Upside down trade-ins are not limited to new car purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25% of all trade-ins toward a used car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used car market.
Edmunds recommends that all car shoppers wait until they have equity in a vehicle before they trade it in for another car. But, in cases where shoppers feel that their only choice is to trade in a car when they’re underwater, Edmunds lays out a few strategies to minimize – or even avoid — the financial blow in its consumer advice piece “Upside Down and Under Water on a Car Loan.”
