SANTA MONICA, Calif.—The number of car buyers trading in vehicles with negative equity continues to rise—a bad sign for the economy, but possibly good news for auto leasing.

Analysts suggest leasing could end the cycle of underwater trade-ins for many, and help right consumers’ balance sheets. They also think leasing’s growth will accelerate, possibly accounting for 40% of all new car sales in 2017.

A new report from shows that more American car buyers are underwater on their trade-ins than ever before. reports that 32% of all trade-ins toward the purchase of a new car this year have negative equity.

GrooveCar told that dealers the company works with set the percentage higher, at 35%.

Those figures are up from an earlier report by J.D. Power that projected the percentage of car owners facing negative equity would hit a 10-year high (31.4%) at the close of 2016.

“This is the highest rate on record, and it’s up from 30% of all trade-ins toward new car purchases from January to September last year,” explained Sr. Analyst Ivan Drury. “These upside down shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.”

One Out Of Three

Drury emphasized that one out of every three owners trading in their vehicles owes more money on their car than it’s worth.

“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” he said. “Consumers are eager to get back into the new vehicle market, and a blend of favorable economic conditions—reductions in unemployment, low fuel costs and low interest rates—in the last few years have been bringing buyers back into the fold.”

As has regularly reported, rising car prices—due in part to vehicles loaded with new technology—are elevating the average new car price (over $30,000) above what many consumers can manage in a monthly payment. Lenders have been extending terms to keep payments affordable.

“Yes, the increase in dollars sunk into negative equity stems from increased transaction prices over time as well as lengthier loan terms,” said Drury. “This means that a consumer who traded in a six-year-old vehicle this year may be on the hook for more monthly payments compared to a consumer trading in a similar six-year-old vehicle last year.”

The issue of upside down trade-ins is not limited to new car purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25% of all trade-ins toward a used car purchase in the third quarter had negative equity. 

“These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used car market,” said Drury.

Forgetting The Past?

Drury acknowledged that rising negative equity is not only an unhealthy cycle for borrowers, it is not a good economic sign. 

Earlier this year, analysts told that just six years after the Great Recession, borrowers and lenders might be forgetting the very recent past.

Some analysts said they were seeing red flags starting to go up the pole in auto lending and credit cards. For auto lending, concerns centered on borrowers not only extending terms but reaching down more heavily into subprime, where delinquencies have been rising. For credit cards, WalletHub (formerly CardHub) quarterly data shows the level of consumer debt is reaching “unmanageable levels.” Since late last year WalletHub has been concerned over mounting credit card debt, and lenders forgetting lessons they learned from the Great Recession.

 As credit card debt continues to mount, both Edmunds and GrooveCar say consumers may have a way out from under negative equity trade-ins that lead to higher loan amounts—leasing.

“Leasing essentially breaks the cycle,” said Drury, noting that the difference between the average monthly payment on a new car purchase ($505) was $77 more than the average monthly lease payment ($428) in the third quarter. “The assumption is that shoppers who trade in a car with negative equity are so eager to get into a newer car that they're willing to eat the cost of what they still owe, either upfront, or baked into their next cycle of monthly payments. If you're the type of buyer who wants a new car every three years or so, especially with all the new technology cars come equipped with, then leasing is a great option because you don't have to worry about negative equity when you're ready to move on to the next car.”

 Habits Changing

Frank Rinaudo, SVP at Hauppauge, N.Y.-based GrooveCar, said the habits of many car buyers are changing, making leasing a better fit for a growing number of drivers. He said more buyers now want new cars every three or four years to keep up with new technology, which runs counter to the need for car buyers to extend loan terms to keep pace with rising prices and manage monthly payments.

“Car buyers often want to end their loans early today, and that leads to the negative equity,” said Rinaudo, who added that GrooveCar dealers reported that about 35% of buyers trade in a car with negative equity today, the highest levels they’ve seen. “With leasing, the terms are shorter and it is much harder to break a lease than get out of a loan. Leases typically come with prepayment penalties. That will keep consumers in their lease and, ultimately, help their finances.”

 As has reported, leasing is at record levels, accounting for 33% of new car transactions in 2016. The problems with negative equity trade-ins will only accelerate leasing’s appeal, Drury and Rinaudo say.

“As these consumers, who are upside down on their trade-ins, learn how leasing can better fit their lifestyles, we suspect that they will become serial leasers,” said Drury.

Rinaudo agrees, saying that leasing’s appeal continues to grow. He said GrooveCar’s CU Xpress Lease program will total $1 billion by the close of 2016, the company’s highest total, and a 27% increase over 2015.

“Nationwide, leasing accounts for 33% of new car sales,” said Rinaudo. “The growth of negative equity trade-ins will only increase that number. Experts say that next year leasing in the U.S. could reach 36%-40% of all new car sales.”

As cited in:

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