Car Buyers Struggle with Inflation and Negative Equity  

High borrowing costs and underwater loans are making it tough for consumers to afford new vehicles. The automotive industry is navigating a tough landscape as inflation hits car buyers hard. Dealers are offering incentives and lowering prices, but borrowing costs remain high, making it difficult for many people to afford new cars. While interest rates have recently been cut, buyers are still facing financial strain. Some are finding themselves “underwater” on their car loans, meaning they owe more on their vehicles than they are worth—a situation that brings significant consequences when it comes to trading in or selling cars.

The Growing Problem of Negative Equity in Auto Loans  

More buyers owe more on their car loans than their vehicles are worth, creating financial complications. Negative equity is becoming increasingly common among car buyers, with 31% of auto loans now underwater according to a recent CarEdge survey. This is a sharp rise from earlier this year and has left many buyers unable to cover their outstanding loan balances through sales or trade-ins. The situation is particularly dire for those with electric vehicles (EVs), as 46% of EV owners are currently underwater on their loans.

Electric Vehicle Owners Hit Hardest by Negative Equity  

EV owners are disproportionately affected, with nearly half underwater on their loans. Longer loan terms, which many accepted to manage inflated car prices, have also exacerbated the problem. Car buyers who opted for 84-month loans have a median equity of -$4,920 compared to -$2,085 for those with 72-month loans, making it harder for them to trade in or sell their vehicles without incurring a significant financial hit.

Relief Arrives in the Used Car Market as Prices Fall  

Used car prices are cooling off, offering hope to buyers after years of inflated costs. While the new car market is seeing only a small decline in prices, the used car market is finally showing signs of relief. In August 2024, one-to-five-year-old used cars sold for an average of $32,672, which is a 4.7% drop from the previous year. More notably, the market has seen a surge in vehicles priced under $20,000, a price range that had all but disappeared in recent years.

Affordable Used Cars Spark a Surge in Demand  

The return of sub-$20,000 vehicles is driving up sales in the used car market. This renewed affordability is boosting demand, with used car sales rising by nearly 14% year-over-year in August. Dealers are responding to this uptick by increasing their inventory levels to meet the growing interest in more affordable used vehicles.

Used Cars Still Pricey Despite Market Improvements  

While prices have fallen, used cars remain significantly more expensive than before the pandemic. Although prices are declining, used vehicles still cost around 40% more on average than they did before the pandemic, indicating that while relief is coming, the market remains challenging for many buyers.

Dealers Prepare for Increasing Demand Amidst Price Adjustments  

Dealers are stocking up on inventory as they anticipate rising sales driven by affordable used cars. Wholesale prices for used cars have dropped by 5% year-over-year, providing dealers with more opportunities to acquire inventory at lower costs. This shift is helping dealers prepare for what could be an ongoing increase in demand for used cars as buyers seek more affordable options in an uncertain economic environment.

Balancing Act Between Negative Equity and Used Car Affordability  

Dealers and buyers must navigate the challenges of negative equity and rising used car demand in a volatile market. As more buyers find themselves underwater on their loans, especially those with electric vehicles and long-term loans, they are delaying new purchases or opting for used cars instead. Dealers, in turn, are adjusting their strategies by focusing on increasing inventory of lower-priced, used vehicles to meet this demand. The delicate balance between managing negative equity and tapping into the growing demand for used cars will be key for dealerships moving forward. Sustainable inventory management and careful attention to market trends will help them navigate the challenges and opportunities in the months ahead.