- Customers buying a car now are at risk of going underwater on their car loans, an analysts warn.
- Financing costs are rising as car values are declining.
- “We are only seeing the tip of the negative equity iceberg,” said Ivan Drury, Edmunds analyst.
If you recently took out a loan to buy a car, especially a Tesla, you’ll likely be paying more for that car than it’s worth soon.
In the final three months of 2022, nearly 16% of consumers who financed a new vehicle and 5.4% who financed a used one committed to monthly payments of at least $1,000, according to Edmunds, which tracks automotive inventory and information. Both figures are record highs, it said.
The higher payments come as vehicle values are dropping, which means consumers are left paying the original balance of their loans — and now at higher interest rates — even if their vehicles aren’t worth as much anymore. Used car prices dropped 2.5% in December from November and new car prices dipped 0.1%, according to the Bureau of Labor Statistics.
It’s a classic “negative equity,” situation in which the value of an asset used to secure a loan is less than the outstanding balance on the loan. Also known as being “underwater” or “upside down,” the scenario is bad for debtors: If they can’t make the payments, then they can’t sell the asset and raise enough money to get out of debt. Lenders will likely repossess the vehicle, leaving the driver with monthly debt payments — and no car to drive.
“We are only…
