27% of Loans for Autos Traded In Last Year Were ‘Underwater’

By Barbara Hollingsworth | February 9, 2015 | 5:00pm EST



(CNSNews.com) –  Twenty-seven percent of the auto loans on vehicles traded in last year were underwater,” according to Edmunds.com.

More than a quarter of car buyers still owed an average of $4,257 more than their vehicles were worth.

Unlike a home, which can increase in value, a new car loses 11 percent of its value on average the minute it’s driven off the dealership’s lot. After five years of depreciation, the same car has lost two-thirds of its value and is typically worth just 37 percent of its original purchase price.

The problem is that many car loans now exceed five years. Although the longer loans mean lower monthly payments, they leave many owners with negative equity in a vehicle that continues to lose value over time.

And rolling the debt from an older vehicle into a loan for a newer vehicle just increases the problem, “like a snowball rolling downhill,” Edmunds points out. “If you brought a balance over from a previous car, you might never break even.”

John Mendel, chief of U.S. sales for Honda, accused his competitors of doing “stupid things” to boost auto sales, including financing depreciating vehicles for as long as 96 months.

“You’re ringing the bell on a new-car sale, but that customer is saddled – they’re stretched so thin,” Mendel said at the North American International Auto Show, which was held last month in Detroit.

Such loans, he added, are “stupid not just for us, but for the industry.”

There were 7.9 million cars sold in the U.S. last year, the most since 2002. With long-term interest rates at historic lows, interest paid over the life of eight- or nine-year auto loan can be "over 400 percent" more than the interest on a more traditional one,” according to the Center for Responsible Lending.

Even some large banks have gotten into the act, making loans to customers with low credit scores and minimal down payments that, combined with extended warranties, dealer mark-ups and other add-ons, sometimes exceed the value of the car.

The practice is prompting fears that the $337 billion market in sub-prime auto loans, which are securitized just like mortgages, will “start blowing up.”

“In the consumer loan categories, most banks anticipated that delinquency and charge-off rates on credit card, prime auto, and other consumer loans would remain around current levels. In contrast, close to one-third of the banks that originated or held on their books subprime auto loans anticipated some deterioration in the performance of such loans in 2015,” according to the Federal Reserve’s January 2015 Senior Loan Office Opinions Survey.

Preet Bharara, the U.S. Attorney for the Southern District of New York, subpoenaed GM Financial and Santander Consumer, two major sub-prime auto lenders, last summer as part of a federal investigation into subprime auto loans dating back to 2007.

But auto finance experts say that even with delinquencies and repossessions rising, sub-prime auto loans comprise a much smaller percentage of outstanding consumer debt than home loans and therefore would not impact the nation’s economy like the sub-prime mortgage crisis did.

“The vehicle marketplace does not resemble the housing bubble," the American Financial Services Association noted in a September letter to Congress in September.

Honda is hoping that it will increase its market share in the U.S. by continuing to offer traditional 36- and 48-month loans that allow people to trade in their vehicles after three or four years without making a down payment - or owing thousands of dollars on their old car.

“They’re in equity, don’t put any more money down, they get another car -- we call it keys-to-keys,” Mendel said. “That’s the kind of experience that really engrains loyalty.”

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