ADG 4/20: Brake Dancing

Key Takeaways

• 30.9% of trade‑ins had negative equity Q1 2024, second‑highest ever
• Underwater trade‑ins owed avg $7,183, up 42% over five years
• 90.2% of negative equity loans span 72+ months, avg 77 months
• Underwater borrowers face 7.9% APR, 100 bps above baseline
• Subprime 60‑day delinquencies hit 7%, highest since early 1990s

Pulse Analysis

The latest Edmunds data paints a stark picture of consumer strain in the auto‑finance sector. Nearly one‑third of trade‑ins now sit underwater, with borrowers owing an average of $7,183 more than the vehicle’s value. Extended loan terms—often exceeding six years—have become the norm for these high‑risk loans, inflating both the total interest paid and the exposure of lenders to prolonged repayment periods. This dynamic is amplified by a 7.9% annual percentage rate, a full percentage point above the baseline, eroding disposable income and limiting households’ ability to service other debts.

For banks, credit unions, and specialty finance firms, the rising tide of negative equity and subprime delinquencies poses a multi‑fold challenge. Delinquency rates for subprime auto loans have surged to 7%, a level not seen since the early 1990s, while prime borrowers are also experiencing a nine‑year high in 60‑day delinquencies. Asset‑backed securities backed by triple‑B auto loans are demanding higher risk premiums, widening to 145 basis points over Treasurys. These trends suggest tighter underwriting standards may soon follow, potentially curbing the flow of cheap credit that has fueled recent vehicle price inflation.

Looking ahead, policymakers and market participants will watch how the auto‑finance stress feeds into broader economic indicators. Persistent consumer debt burdens could dampen retail spending, pressuring inflation‑adjusted growth. Lenders may respond with shorter loan terms, higher down‑payment requirements, or more aggressive credit‑score thresholds, which could reshape the competitive landscape for both traditional dealers and emerging fintech platforms. Monitoring the trajectory of negative‑equity trade‑ins will be crucial for anticipating credit‑cycle turning points and for investors assessing exposure to the automotive lending sector.