Each passing year witnesses a steady climb in the price tags of new cars, accompanied by lengthening loan terms that nevertheless result in escalating monthly payments, plunging many into the predicament of being submerged in debt. Now, a fresh complication arises: the decline in prices of used cars, leaving individuals with over-leveraged trades receiving lesser value than ever before.
A recent study by Edmunds delved into the correlation between declining used car prices and trades burdened with negative equity, revealing a substantial surge in the latter. This phenomenon, as per the report, isn’t unforeseen but rather a natural consequence following the used car market boom during the lockdown period. Ivan Drury, Edmunds’ director of insights, cautioned, “A storm is brewing in the used market as incentives and inventory continue to trickle back into the new vehicle market.”
Drury further explained, “During the last few years, consumers could jump into new car loans and their trade-ins were shielded from negative equity because some dealers, desperate for used inventory, were willing to pay near original purchase prices. These days, consumers need to be more careful — especially if they’re trading in newer vehicles — because near-new cars are being hit the hardest by depreciation.”
With the foundation crumbling beneath the used car market, prospective buyers of new cars are increasingly at risk of being overextended on their loans. However, Edmunds warns against premature celebration, suggesting that the situation isn’t favorable for budget-conscious buyers either.
While the decline in used car values poses challenges for an expanding segment of new car owners, Edmunds analysts identify a silver lining for those with deeper pockets. Luxury large cars present significant savings, with an average discount of $48,111 compared to new vehicles, indicating potential opportunities for savvy shoppers. Joseph Yoon, Edmunds’ consumer insights analyst, advised, “If you want to save big on used versus new, you still have to be willing to spend big.”
Unfortunately, the analysis notes that price-sensitive consumers seeking affordable transportation may struggle to find significant discounts due to the limited supply of older used vehicles.