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The Negative Equity Auto Loan Crisis

Longer terms on auto loan may be contributing to more car owners facing negative equity than ever before.

Gone are the days where an auto loan with a term of 5 years would be unthinkable. These days, the average new-vehicle loan is 69 months. And loans with terms from 73 to 84 months now make up almost one third (32.1%) of all new car loans taken out. For used cars, loans from 73 to 84 months make up 18% of all auto loans.

America faces a negative equity auto loan crisis with upside down loans

The issue with these longer loans is that experts now believe extending terms has created a crisis in the auto industry. More and more, consumers can wind up with a negative equity auto loan. It’s an issue that’s becoming more prevalent, leading experts to wonder if we’re headed for an auto loan market crash.

What is a negative equity auto loan?

Negative equity occurs when property is worth less than the balance of the loan used to pay for it. It’s a problem that many homeowners encountered after the 2008 real estate crash. As property values plummeted, people owed more on their mortgages than the homes were worth. So, you owe $180,000 on a home that was only valued at $150,000 following the crash.

Now that same problem is cropping up in the auto industry, but for different reasons. Unlike homes that typically gain value over time, cars almost always lose value quickly. At the same time, loan terms are getting longer. That helps consumers qualify for loans, because the monthly payments are lower. However, it’s easier for the care to depreciate faster than you pay it off.

What’s the problem with negative equity car loans?

The biggest problem comes with the trade in. You know how annoying it is when you go to get a new car and you get barely any credit for the trade in? Imagine going to buy a new car and being told you owe money on the one you want to sell.

That’s exactly the issue that many consumers face today. What’s more, increasing the term also increases total cost. Let’s say you finance a new car for $20,000 with a $1,000 down payment and no trade in. If you had good credit, you could get an interest rate of less than 5%. However, let’s say you have subprime credit, since that’s where the most negative equity issues arise. Those rates on average can be as high as 13%.

At 13% APR on a $19,000 auto loan:

Monthly paymentTotal interest charges
36-month loan$640.19$4,046.66
48-month loan$509.72$5.466.68
60-month loan$432.31$6,938.50
72-month loan$381.41$8,461.38
84-month loan$345.65$10,034.37
*Calculations determined using Auto Loan Calculator from

If you extend the term to eight years, you end up paying half of the purchase price in interest charges. Your $20,000 car ends up costing $30,034.37.

Negative equity becomes a problem if you try to sell the car before the end of the eight years. If you try to sell after five years, there’s a good chance the loan balance will be higher than the car’s value. You’d basically have to pay to make up the difference.

The moral of this auto loan story

“Extended terms often only make sense if you plan to keep the car for that many years,” explains April Lewis-Parks, Financial Education Director for Consolidated Credit. “If you like to get a new car every five years, then taking out 72 or 84-month loan only increases your potential to run into negative equity troubles.”

Consider these tips when you want to buy a vehicle, new or used:

  • Check the Kelly Blue Book value to see how fast the value of the car depreciates. If you buy used the purchase price should never be higher than the KBB value.
  • Keep your purchasing habits in mind – how often do you like to trade in?
  • Always use the Truth in Lending Disclosure statement to evaluate the total cost of your purchase. Total cost is purchase price plus total interest charges; these are always listed on the disclosure you should receive when you apply for the loan.

For more information on how to manage your auto loans effectively, visit Consolidated Credit’s Guide to Managing Auto Loan Debt.

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