A record number of consumers are finding themselves 'underwater' when it comes time to trade-in their vehicle - the vehicle is worth less than what they owe on their loan.
The Detroit Free Press cites a study done by Edmunds revealing that in the second quarter of this year, 32 percent or nearly one-third of vehicles being traded in fall into the 'underwater' category. This isn't good news for consumers since the difference is tacked on to the new vehicle they had their eye on.
To put this in perspective, the previous high was 29.2% in 2006, around the time where the housing market was reaching its cresting point.
“There’s been a lot of water building behind this dam for some time because of higher transaction prices, lower down payments and long-term loans," said Greg McBride, chief analyst with Bankrate.com.
"It’s problematic for the consumer because there’s no foolproof way to eliminate his financial exposure. If the car gets stolen, is totaled or you get new car envy while you’re upside down then it’s a big problem."
- In October, the average transaction price of a new car was $34,663 according to Kelly Blue Book.
- The average length of a new car loan hovers around 68 months according to Experian Automotive. This rises to 72 months if it's a subprime buyer - someone whose credit score is below the low 600s.
Not helping matters is the amount of vehicles being returned from leases, flooding the used car marketplace. This increase is causing dealers not willing to spend a lot of money at auction.
Source: Detroit Free Press
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