Let’s say you want to trade in your old car for a new one, but you haven’t paid the old one off. And actually, the old one is worth less than what you still owe on it. That’s called being underwater or upside down, and JD Power reports that roughly one-third of people trading in their old cars are underwater on their car loans.
We’ve got three reasons this is happening. One: New cars have gotten way more expensive, according to Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.
“We’re seeing fewer and fewer manufacturers offering vehicles that are under $35,000, under $30,000,” he said. “Competition has been pushing the price up, and nobody is filling the gap at the bottom.”
Unlike a house, whose value typically increases over time, with a car, “as soon as you drive it off a lot, you owe more than it is worth,” Fiorani said.
The second issue: Car loans are getting longer.
“We went from everyone having 36-month loans at the beginning of the century to now the average consumer is essentially in a 72-month loan,” said Tyson Jominy, senior vice president of customer success at JD Power.
Jominy said longer loans mean it takes longer for cars to be worth more than what you owe on them — which, over a decade of ownership, wouldn’t be an issue.
But “no matter what kind of loan consumers have, or how long it gets, consumers still return to market pretty consistently, around four years,” he said.
This trend won’t hurt car dealers much, Jominy added, since they often provide incentives that clear the old car’s balance so buyers can afford a new one.