26% of consumers are upside-down

[mchastek]

Edmunds.com published an article stating that 26% of consumers are upside-down on their loan, meaning they owe more money than their car is worth. In February 2005, on average these consumers had $3,646 in negative equity. Being upside-down can be a very risky financial situation, especially when a shockingly large number of consumers are trading in their current vehicles with negative equity for newer vehicles.

What are your thoughts?

[listseller]

I worked for a dealership quite a few years back, we saw this alot. Consumers seem to be making decisions based upon everything except their pocket books. Everyone wants to finance with nothing down, low monthlys which equals a long loan. 2.5 years later they come back to upgrade and trade in a vehicle with negative equity- just think of the debt after about 10 years.

[michael j boruta]

i'm guessing the 26% figure quoted is low.not that i am arguing with a company like edmunds i'm sure they are very well versed and have a vast gold mine of information. but if you take a couple of minutes to think about the whole picture....zero down and zero financing how could you not be up side down in a couple of years ??? anyone who has spent any ammount of time in this industry knows there are only a couple of car lines that hold value.with todays prices being as they are and i have heard the "it's all relative story" i find it hard to believe the 26% figure.....

[mchastek]

i'm guessing the 26% figure quoted is low.not that i am arguing with a company like edmunds i'm sure they are very well versed and have a vast gold mine of information. but if you take a couple of minutes to think about the whole picture....zero down and zero financing how could you not be up side down in a couple of years ??? anyone who has spent any ammount of time in this industry knows there are only a couple of car lines that hold value.with todays prices being as they are and i have heard the "it's all relative story" i find it hard to believe the 26% figure.....

Michael -

After reading your response, I went and did some more research. I found numbers ranging from Edmund's 26% up to as high as 40%. In my personal opinion, I agree with you that 26% sounds very low.

To add fuel to the fire, not only is a consumer getting into this situation by buying a car with zero down and very long loan terms (as high as 84 months now), but the fact that new cars are being pushed with very large incentives decreases the value of their used vehicle.

This situation is especially true with those vehicles which depreciate more rapidly than others - generally, Ford and GM models.

It's pretty scary when articles start appearing encouraging consumers to use their tax returns to pay down their negative equity in their vehicles! That alone makes me believe it must be higher than 26%!

[mchastek]

Interestingly enough, at this week's CBA conference, during a presentation it was said that the number of consumers that have negative equity in their vehicle is more like 40%. I believe the data was provided by J.D. Power.

[mchastek]

Interesting article from Auto Remarketing about this exact topic (http://www.autoremarketing.com/ar/news/story.html?id=3486):



IRVINE, Calif. (April 28, 2005) -- Six out of 10 new car buyers prefer a longer term loan with low monthly payments when financing their next vehicle, according to Kelley Blue Book Marketing Research's New Vehicle Buyer Attitude Study on Financing.


Industry estimates are that nearly 30 percent of new-vehicle shoppers currently owe more on their vehicle than it is worth.



According to the study, the average term for a consumer car loan grew from 48 months in 2000 to 63 months in 2004. These consumers who are "upside-down" in their current vehicle loan could put themselves further into financial jeopardy by extending their next new-vehicle loan past the average four- to five-year term, yet as a group they do not seem concerned about the ramifications.



"Consumers who purchased vehicles with little or no money down and for a six- or seven-year term will find they owe more than the car is worth when seeking out their next new vehicle," said Jack R. Nerad, editorial director of Kelley Blue Book's kbb.com. "This negative equity leaves future buyers two unpalatable choices: either stay in their current vehicle longer or pile on still more debt."



Both choices have negative implications for carmakers, according to KBB. If this one-third of the market keeps their vehicles longer, new sales and growth potential will be hindered in what is already a sluggish new-vehicle market, company officials said. And if consumers add more debt, carmakers can expect more defaults on car loans and bankruptcies, costing carmakers' captive finance arms millions and limiting market growth.



"Just as an over-reliance on low-cost, subsidized leases came back to bite manufacturers and financial institutions in the 1990s, so too could the move to increasingly longer loan terms in this decade," Nerad said.



The 2005 Finance study also found a declining number of consumers researching their financing options online prior to purchase than 18 months previously. Consumers cited convenience and the expectation of low interest rates from manufacturers as their reason for obtaining financing through the dealership.

[aaron kominsky]

seems low in my store we average bout 40 to 50% upside down dealers chase payoffs way too much giving up front end profit and trade vehicles too high just to spot a new vehicle customer will pay a higher pymt to get new vehicle they work the sales mgr for all the money

[Rennsport Calgary]

And with all the employee pricing promos it's not going to get any better. I'd hazard a guess that the big 3, by virtue of literally giving away the barn to unprecedented levels, have now devalued the entire last two years of previous client purchases as well by a significant margin. I'd say 50% is my gut number of those upside down.....and it's by at least "another" $2K per car just due to the promotion.

While I don't deal in domestic cars, the dealer principals that I know have stated that they had to retrain all their sales staff in how to do the trade-in game with employee pricing. Basically take last weeks ADESA or MANHEIM auction numbers....subtract fees and a small profit for the trouble and that is your new trade-in value. The trade-in "overallowance" is gone since employee pricing is basically a "one price" concept like Saturn now.

[mchastek]

And with all the employee pricing promos it's not going to get any better. I'd hazard a guess that the big 3, by virtue of literally giving away the barn to unprecedented levels, have now devalued the entire last two years of previous client purchases as well by a significant margin. I'd say 50% is my gut number of those upside down.....and it's by at least "another" $2K per car just due to the promotion.

While I don't deal in domestic cars, the dealer principals that I know have stated that they had to retrain all their sales staff in how to do the trade-in game with employee pricing. Basically take last weeks ADESA or MANHEIM auction numbers....subtract fees and a small profit for the trouble and that is your new trade-in value. The trade-in "overallowance" is gone since employee pricing is basically a "one price" concept like Saturn now.

It must be a real shocker to have your car go down that much in value the instant the manufacturers pull one of their discount stunts. That possibility alone is probably steering a good number of potential buyers away! If you really crunch the numbers, if you're losing 50% in 3 years on a new domestic, it's actually CHEAPER to buy a more expensive import (Lexus, BMW, etc) that will hold its value.

[Epster]

26%? Whomever conducted that study is dislexic!! It is more near 62% upside down. Everyone has great points. Long terms, 0 down, etc is killing the trade cycle. We are seeing the effects of the past 10 years of high profits. Even with big rebates the consumer is still upside down.

Example: I was a GSM for a Chevrolet Dealer last year. For Christmas, I purchased a 2005 Taho Z71 with Navigation, DVD, Captain Chairs, Onstar, all the options. MSRP was just over $50000. Invoice was $44000+ After employee discount, manufacturer rebates, and a trade that I had equity in I financed only $27000. $17000 below invoice. 5 months later and near 10k miles this truck will only retail for the low $30's. If we bought a Lexus $17000 below invoice I would be much farther ahead of the game! Domestics do not hold value, plain and simple. Consumers need to put money down at least 20% and leasing should be the 1st option. Leasing is the only way to end the viscious trade cycle. The negative equity disappears at the end of the term.

My $.02

[Topshop]

And what happens when consumers are over burdened with car payments? (Make sure you scroll down to the statistics listed for each state)

http://realtytrac.com/news/press/pressRelease.asp?PressReleaseID=99

[mchastek]

And what happens when consumers are over burdened with car payments? (Make sure you scroll down to the statistics listed for each state)

http://realtytrac.com/news/press/pressRelease.asp?PressReleaseID=99

Right... and now that gas costs $3.00+/gallon, this isn't going to get any prettier!