Longer Loan Terms Drive Negative Equity Trade-Ins

  • Huixin Deng
  • July 13, 2017

Negative equity trade-ins are on the rise due to lenders extending loan terms past 72 months, Ivan Drury, senior analyst at Edmunds.com, told Auto Finance News.

Around 45% of consumers trade in their vehicles and roughly a quarter of them have negative equity, he said. This is due in part to some financing programs offering 84-month and 96-month auto loans — much longer than he expected. An ideal auto loan should be less than 72 months because consumers get tired of the old cars after six years, he added.

“We’re so used to the concept of a monthly payment that we basically use it everywhere — for phones, for cable, for Amazon Prime — and of course, we would like to have a low monthly payment, meaning a low APR,” Drury said.

For many years, dealers have provided extremely low APR to incentivize consumers, even going down to 0% at times. Average new-vehicle APR was 4.96% in June, 5.7% lower compared with a year ago, according to an Edmunds report. Among used vehicles, APR was 7.64% in June, dropping 2.7% from a year ago.

“The APR remains consistent and low,” he said. “It’s not a spike. I think the percentage will maintain around 5% to 6% for the rest of the year.”

New-vehicle loan terms are not anticipated to shorten in the next few years; rather, terms are expected to go slightly longer, Drury said. However, used-vehicle loans and rates will remain relatively unchanged in the coming years due to changes in the supply.

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