Edmunds: High rates & negative equity hamper Q1 auto financing

Along with more insight about how much negative equity is an industry hurdle, the latest auto finance data from Edmunds highlighted how affordability challenges triggered by stubbornly high interest rates are impeding growth in the new- and used-car markets.

Edmunds explained auto-financing growth is being hampered even with the return of new-vehicle incentives because everything appears tied to wider impact from the current high inflationary environment.

Plus, experts pointed out what they believe to be the “near extinction” of the $20,000 new vehicle.

Here are four main points from the new data Edmunds distributed on Tuesday:

Interest rates remained elevated in Q1

The average annual percentage rate for new vehicles delivered in the first quarter was 7.1%, marking the fifth consecutive quarter this figure has remained above 7%.

Meanwhile, Edmunds indicated the average APR for used vehicles financed in the quarter rose one-tenth of a percentage point year-over-year to 11.7%.

New-vehicle average monthly payments continued to hover above $730

Edmunds indicated the figure settled at $735 in Q1, $4 below last quarter.

Meanwhile, used-vehicle monthly payments dipped to $546, down from $561 in Q4 2023 and $551 in Q1 2023.

Negative equity continued to climb

An element Edmunds has cautioned the industry about previously, analysts found that the share of new-vehicle purchases involving trade-ins with negative equity rose to roughly one-quarter of all sales, reaching 23.1% in Q1. That’s up from 18.3% a year ago and 14.7% in Q1 2022.

Furthermore, the average amount of negative equity on those trade-ins reached an all-time high of $6,167 in Q1, according to Edmunds.

New-car shoppers continued to opt into $1,000 monthly payments at a significant clip

Edmunds reported the share of consumers with new-vehicle monthly payments of $1,000 or more remained above the 17% mark for the fourth straight quarter.

Analysts found that the share ticked down to 17.3% in Q1 from the record high of 17.9% in Q4.

“Punxsutawney Phil may have predicted an early spring, but high interest rates continued to cast a dense shadow over the car market in Q1,” Edmunds head of insights Jessica Caldwell said. “Compelling new product launches combined with the reintroduction of incentives and rebounding inventory in the new vehicle market are all positive signs for shoppers, but elevated interest rates have dampened any positive market momentum.

“The resurgence of negative equity is only compounding the affordability challenges, as consumers who regretted their pandemic-induced purchases are now encountering lower-than-expected vehicle values when returning to dealerships for a new purchase,” Caldwell continued.

To illustrate how negative equity adversely affects owners who decide to roll the outstanding balance into a fresh financing, Edmunds analysts took a closer look at average monthly payments, APRs and contract terms for dealer-financed new vehicle purchases involving a trade-in with negative equity:

—In Q1, the average monthly payment for a new vehicle that only included a trade-in with negative equity was $887, together with an average APR of 8.1% and average term length of 75.8 months.

—In contrast, new-vehicle sales involving trade-ins with or without negative equity averaged a $736 monthly payment in Q1 2024 with a 7.1% APR for 68 months.

—In Q1 2021, the average monthly payment for a new vehicle that only involved a trade-in with negative equity was just $662, with an average 5.9% APR for an average of 76 months.

“The monthly payment might be a tolerable amount, but it’s critical for consumers to consider all elements of their loan when financing a car purchase in 2024,” Edmunds director of insights Ivan Drury said in the news release. “And once you’re locked into a loan, try to avoid the temptation of trading that vehicle in too soon.

“Factors like gas prices, vehicle maintenance costs and work commute changes may feel like reasons to trade in your keys for a shiny, new ride, but a new high-dollar car payment with a high interest rate tied to existing negative equity should serve as a rationale for pumping the brakes,” Drury went on to say.

Quarterly New-Car Finance Data (Averages)

Quarterly Used-Car Finance Data (Averages)

Source: Edmunds