Predictions for the Mass Inequity in Trades in Auto Right Now

During the COVID-19 pandemic, car dealers were selling vehicles often before they landed on the lot and in many cases, at or above sticker price. While that might have been good for dealers at the time, the ever-shifting car market is in a very different state in the years after the start of the pandemic. 

Now, many car shoppers are now faced with inequity in trades (or underwater/upside-down car loans, negative equity). 

First, let’s talk about the two different types of equity when it comes to loans:

• Positive equity – When the market value of your car exceeds the amount of principal left on the loan. For example, if your car has a $10,000 trade-in value and you owe $8,000 on the loan, you have $2,000 worth of positive equity. You can use that equity towards a new car loan.
• Negative or upside-down equity – An upside-down or underwater car loan refers to the market value of your car being less than the amount of principal you owe on your loan. For example, you owe $45,000 on your outstanding car loan but the trade-in value of your car is $40,000, you have a negative equity amount of $5,000. Before you can trade in the car, this is the amount you will have to pay out of pocket to the auto loan lender. You can see how this could be a problem as the sale price of the trade in won’t be enough to pay off the loan in full.

What’s happening now is that inventory of new and used cars is beginning to recover since the peak scarcity we saw during the pandemic. Inflation and other factors have led to decreased consumer demand and thus, people aren’t generally buying above sticker prices any longer. With used car prices being down 11%, those who paid at or above sticker prices may be stuck with negative equity. When those people go to trade in their vehicle for a new one, they may be surprised to learn that they own more than it's worth and have to pay the difference out of pocket. 

Unfortunately, when someone is upside down on their car loan, there’s not a whole lot they can do. Things that may help these customers are:

• Manufacturer rebates for new vehicles
• Lower interest rates for loans
• 0% down incentives

This inequity in trades may have understandably taken some buyers out of the car market for a few years. Although the average age of vehicles on U.S. roadways is 12.1 years (according to a 2021 study from research firm IHS Markit), many people still trade in their vehicle every 2-3 years. Inventory, rising inflation and interest rates, and other factors have contributed to the increase in people holding onto their vehicles for longer. However, over the next 12 months, we may expect to see more manufacturer rebates being introduced to entice buyers back onto the lot. It’s uncertain when interest rates will decrease but we may also see 0% down offers resurface as another way to entice buyers. 

For your customers in a negative equity situation, maintaining a positive service relationship with them will remain key. That’s always important but especially when they might be holding onto their vehicle longer than they normally would. And when your customers are ready to upgrade their vehicle again, you’ll be at the top of their minds.