Edmunds spots 2 negative-equity records arriving in April

Finance companies are rolling record amounts of negative equity into the new-vehicle paper they’re originating nowadays.

While providers might be prudent as to how deep down the credit spectrum the most generous new-model offers are extended, Edmunds reported on Tuesday its data shows April established an all-time record as 44% of new-vehicle sales with a trade-in had negative equity. That figure is up from 40% in March and 33% in April of last year.

Furthermore, analysts discovered the average amount owed on upside-down installment contracts also climbed to an all-time record high of $5,571 in April, compared to $5,405 in March and $5,036 last April.

“At first glance, the numbers are certainly alarming, but there are some potential upsides for shoppers with negative equity who purchased a vehicle in April compared to those who did so just a year ago,” Edmunds senior manager of insights Ivan Drury said in a news release.

“Automakers are offering some of the most generous incentives we’ve seen in decades to generate demand during the pandemic, and consumers stuck in high-interest loans might be able to make these work to their advantage,” Drury continued.

In a deeper analysis, Edmunds also generated an array of year-over-year comparisons about new-vehicle financing, looking at terms, interest rates, total amount financed and age of the trade.

Source: Edmunds

“Most experts would traditionally advise consumers against trading in their vehicle if they're upside down on their car loan. However, the market is in a unique place right now due to the coronavirus pandemic,” Drury wrote in that analysis.

“To help spur sales, automakers are offering extremely generous financing incentives, and consumers could use these offers to their advantage to put themselves in a better financial situation,” he continued.

“Individuals who are underwater on their car loan or are trying to get out of a high-interest loan could essentially reset their loan and acquire a newer and nicer vehicle, for a similar monthly payment,” Drury went on to say.

Drury elaborated about the trade-in metric Edmunds discovered. He reiterated that typically, the trade-in age of a vehicle directly correlates to consumer loyalty with older trade-ins resulting in lower loyalty.

“Encouraging consumers to roll their negative-equity loans into a new purchase with a longer loan term would seem to be extremely risky for automakers,” Drury said. “However, given how much better current interest rates are, consumers might be able to make a longer-term loan work to their advantage with the appropriate guidance and education from lenders.

“And from a loyalty standpoint, they might be more inclined to stick with a brand that was there for them during a stressful time in their lives,” he added.

Furthermore, Drury pointed out how this negative-equity situation could present dealerships with the chance to generate some much-needed revenue via the finance office.

“Dealers have the opportunity to sell extended warranties and service contracts to help allay the concerns of customers financing a long-term loan with negative equity,” Drury said. “GAP insurance also presents a good selling opportunity since it can mean the difference between a consumer owing money on a vehicle determined to be a total loss in an accident versus walking away with no financial responsibility.”

Some criticize the risk involved in longer loans because they outlive most warranties, but this has already been the case for over a decade: The average loan length hit 60 months in January 2003 and consumers haven't turned back since,” he continued.

“For the millions of consumers who are currently upside down on their auto loans, the opportunity to purchase a new car at a much lower interest rate is a very compelling prospect, especially as this recession has consumers reevaluating their monthly budgets,” Drury concluded.