Car Debt Is Adding Up Fast as Consumers Loan Amounts Exceed Car Values

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Many consumers have car loans surpassing the value of their vehicles. Learn about the dangers of rising loan-to-value ratios — and what it means for borrowers. 

The pandemic brought a wave of financial challenges. As a result, the price of used and new cars skyrocketed due to supply chain issues. Since hitting its peak last year, car values have declined, leaving many Americans caught in a situation where they owe more than their cars are worth.

Loans hit 125% of vehicle value in Q1 this year

As reported by Yahoo! Finance, a study released by TransUnion and J.D. Power found that loan-to-value (LTV) ratios for used cars have increased to 125%, compared to 104% for the same period in 2021. This means that borrowers’ auto loans now surpass the value of the vehicles by 25%.

Consumer debt exceeding a vehicle’s value, also known as negative equity, has been on the rise, with some individuals walking into car dealerships to end up underwater by $10,000. Higher interest rates have also added to the cost of a car. The total interest paid ends up being about 140% more than on the same car purchased last year.

Delinquencies expected to rise

The issue of negative equity has become a growing concern for both consumers and dealers alike. Higher LTVs could lead to more delinquencies, which means that more people may find themselves defaulting on their loans.

This trend signifies a significant problem for consumers who are already buying at high prices and rolling debt from one car to another, sometimes stretching loans to seven years.

What you can do to manage your car debt

What can be done to mitigate this risk? Putting down a larger down payment can help reduce the overall amount you need to borrow and put you in a more favorable LTV position. If you don’t have the funds for a down payment, consider postponing the purchase until you do.

In addition, purchasing a used car can save thousands of dollars in upfront costs and lower the overall loan amount needed. Also, if you’re stuck in a high-interest loan, refinancing can save you money on interest costs over the life of the loan. Be sure to shop around for the best rates and terms.

Longer loan terms may reduce the amount of the monthly payment, but it’s wiser to choose a shorter loan term to save on interest costs over the life of the loan.

Car debt is on the rise, but there are steps you can take to manage it wisely. By understanding the factors contributing to the increase in car debt and implementing strategies to put yourself in a better financial position, you can avoid getting into a debt cycle and achieve financial stability.

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