Car loan buyers are at risk as financing rates rise, prices fall

Consumers buying a car now risk going under the water on their car loans, an expert has warned. explore.
Financing costs are rising due to lower car prices.
“We’re looking at the tip of the iceberg,” said Edmunds analyst Ivan Drury.

If you recently took out a loan to buy a car, especially the TeslaYou may be paying more for that car than it is worth in the near future.

In the last three months of 2022, almost 16% of consumers who financed a new car and 5.4% financed a used one to give each month at least $1,000, according to Edmunds, which deals with vehicle information and information. Both figures are record highs, it said.

Higher down payments come as car prices fall, meaning buyers are left to pay off the original balance of their loan – and therefore higher interest – even after it’s gone. their car. Used car prices fell 2.5% in December from November and new car prices fell 0.1%, according to the Bureau of Labor Statistics.

A common condition is “negative equity,” where the value of an asset used to secure a loan is less than the balance on the loan. Also known as “underwater” or “downside,” the scenario is bad for creditors: If they can’t pay, then they can’t sell the asset and raise money to get out of debt. Lenders will likely repossess the car, leaving the driver to make monthly payments — and no car to drive.

“We’re looking at the tip of the negative-equity iceberg,” with car prices, especially used car prices, expected to continue to fall, said Ivan Drury, director of Edmunds knowledge.

Tesla buyers beware

In a bid to boost sales, Tesla made a surprise announcement last week that it would US inflation on some versions of its best-selling Model Y SUV it is almost 20%, and the base price of the Model 3, its most expensive model, is about 6%. The price cuts will make most of its vehicles eligible for an electric vehicle tax credit under the Inflation Reduction Act.

The action was quick answer on Twitter from people who bought luxury cars in the past year. Not only did the price cut drop the price of all new and used Teslas across the board, but it left people paying off loans at a higher rate.

“If you just bought one, you probably got angry and turned it down,” Drury said. “The roof was the new price of the car and that ceiling fell down.”

Beyond Tesla

Cars two years ago were overpriced like supply chain snarles prevent new cars from coming to market. The high prices of those cars, along with low interest, allowing people to take advantage of the equity on their loans and leases and buy more expensive cars. Equity means that if you bought your car, you would have enough money to pay off the loan and more.

“For a while, some people bought a car that went up in value, used it, then sold it above the original value, made a profit and drove it for free,” said Martin Ellingsworth. , director of P&C Insurance Intelligence at JD Power.

“But as we move into an environment of lower used car prices and higher interest rates over the past few months, consumers are less likely to use those risky loan decisions,” Drury said.

Suppose you invested $30,000 at a 4% rate in 2021 over 60 months. By the end of the first year, there is $24,000 left to repay. Even if your car’s value drops to $27,000, you can still have good equity.
That’s the difference with the financing of $ 30,000 at 7% over 60 months last month, when the price of the car can drop by a few thousand dollars. After two months, you only owe $29,000, and you’re already in the water.

Yes, if happy prices continue to riseAs economists predict, the economy slows down and the weather cools down, which will lower the price of cars and put more loans under water, said Patrick Rosenberg, director car finance for JD Power.

“When the sale is delayed, the sellers and the producers will give refunds to accommodate it,” he said.

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In the fourth quarter, which runs from October to the end of December, 17% of new car sales and a trade-in had the same quality, compared to 15% in the fourth quarter of 2021 and 32 in the fourth quarter of 2020, Edmunds said. Meanwhile, the average debt on loans increased to $ 5,341 from $ 4,141 in the fourth quarter of 2021 and $ 5,059 in the last quarter of 2020, the data showed.

“Dealers who sold in November and December also took a hit,” said Drury, holding a car worth less than what they offered. “They’re holding money that doesn’t exist anymore.”

What can you do?

Like houses, you can imagine refinancing but seeing that interest rates are rising, it may not be appropriate.

The best thing to do if you’ve already bought your car and given it a higher loan amount, says Drury, is to record your car at as long as you can. “Drive until the wheels fall off,” he said.

Equity is “not a problem until your next transaction,” he said. “At some point, you’re going to have a good balance.” It’s usually at the end of the loan term that you have enough interest and down payment to recover your car’s original discount.

If you haven’t bought a car yet and don’t need it right away, wait. Many analysts expect auto prices to continue to fall as the Federal Reserve raises its short-term lending rate to slow spending and prices.

The Fed does not control consumer prices, but the effects of rate hikes ripple through the economy, and consumer prices tend to follow suit. That said, prices may stop rising and remain at a high level this year.

This year “it’s going to be back to normal,” Drury said. “People will not pay above MSRP (manufacturer’s suggested retail price). Manufacturers will offer refunds and rental deals.

How to get the best interest rate for car loans, if you need to buy a car

Sometimes life changes require you to buy a car right away or maybe, you really want one now. If you can’t wait, here are some things to consider so you can get the best deal:

Look for the best financing available to your credit score. Credit scores affect the rates lenders can offer you.
Consider adding a cosigner who has a better credit score than you.
Put more money into sales to meet rising costs. The average down payment for new cars and used cars was the highest in the fourth quarter, reaching $6,780 and $3,921, Edmunds said.
Use the shortest repayment period you can afford. You may have a lower monthly payment and a longer term but in the end, you can end up paying more in full.

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