Rising Auto Prices Leading to Increasing Negative Equity Loop

Rising Auto Prices Leading to Increasing Negative Equity Loop

Used car prices are slowly starting to make their way back down after reaching record highs for several years after the pandemic. While this is great news for car buyers who need to start shopping now, it is not so great news for those who had to go to a used car dealership to buy a car when prices were high. The lower price tags now mean that they owe much more for their car than it is now worth.

What Does It Mean to Be Upside Down on A Loan

When someone is upside down on their car loan, it means that their car loan or what they owe is more than what the car is worth. If you have this negative equity and want to sell or trade in your car, you will need to come up with this money out of your own pocket before you can take out another loan to pay for another vehicle.

How does this happen, you might wonder? Well, it often happens when you have a loan that lasts for several years, and the vehicle that you purchased has significantly depreciated in value since you bought it. The high used car prices after the pandemic forced many car buyers to purchase cars for more than they were worth, and now that the prices are falling, they hold even less value, but they still have those high car payments to make.

How to Get Right-Side Up

The good news is that all is not lost if you find yourself upside down in a car loan. While it’s not easy, you can start moving in the right direction to get back on top. One of the things you can do is make some extra payments. The faster you start paying down the loan, the quicker you’ll get out of a negative equity situation.

Refinancing is also an option. Although the process won’t reduce the loan balance, if you shorten the terms of the loan, you can save money over time. Just keep in mind that shortening the length of the loan will increase your monthly payments, so be prepared for this.

It’s Happening with New Cars, too

It doesn’t matter whether car buyers are going to a used car dealership or a new car dealership; this increasing negative equity trend is having a significant impact. Almost have of new car purchases involve a trade-in, and people who purchased used cars in the past few years are now trading them in with negative equity. Now, with the addition of high interest rates, it is not easy to find an affordable vehicle, new or used.

So What Should We Do?

The key is to be patient. If you can hang onto your car for a while, wait it out, or take the time to shop around to find the best deal. If you’re upside down, take some steps to get right side up again before you get into a new vehicle.


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