A Record 25% Of Used Car Trade-Ins Are Underwater

Tyler Durden's picture

We have frequently written about the unsustainable trends in new car sales in the United States created by the combination of lower rates, loosening underwriting standards and voracious demand for new securitizations by wall street and pension funds that will do just about anything for an extra 20bps of yield. 

Today, we find that Edmunds' "Q3 2016 Used Vehicle Market Report" reveals that many of the same problems also afflict the used auto market.  The most startling takeaway from the report is that the percentage of used cars being traded in with negative equity values continues to spike and currently stands at an all-time high 25%.  Moreover, the average balance of the negative equity also continues to rise and stood at $3,635 for Q3 2016, up from roughly $2,750 in Q3 2011.



Meanwhile, the average used car price also continues to rise and stood at $19,200 as of Q3 2016.  This implies that, since most people simply roll their negative equity into their new loans (because, why not?), many used car buyers are likely sitting on loans where ~15-20% of their outstanding balance simply reflects their negative equity from their previous car. 



But wait, there's more (think weekend CNBC infomercial).  Despite rising average used car prices and rising negative equity, average monthly payments for used cars have managed to stay pretty much flat since Q3 2011.  Obviously, monthly payments are determined by 3 variables: beginning loan balance, interest rate and term.  While interest rates have certainly come down from Q3 2011, they haven't declined nearly enough to offset a $3,300 increase in starting principal balance which indicates that, like new car loans, used car loan terms are getting stretched out further and further to manage monthly payments.



Of course, none of this is terribly surprising...just another ponzi scheme, courtesy of accommodative fed policies, which will all come crashing down at some point.  And while timing when bubbles will burst is always tricky, with terms already maxed out, treasury yields spiking and used car purchasers extremely sensitive to monthly payments we suspect the time could very well be near.

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balz's picture

Underwater cars aren't that useful.

Boca's picture

make decent coral reefs

Manthong's picture

So does the Oriskany.

I just wish they would have lashed McCain to a stanchion and let him go down with his ship.



Manthong's picture

..and he used a car, a used car.

Boris Alatovkrap's picture

Obviously many used car lot is location too close to coastal flood plain…

Manthong's picture

For Sale:

One slightly waterlogged 1967 Oldsmobile Delmont 88

Single owner, only 13,000 miles

Contact Brain Dead Ted. 867-5309


glenlloyd's picture

I'd love to have a 67 Delmont...

Haus-Targaryen's picture

I'm waiting for this auto-bubble to pop.  

I figure next car is likely going to have to last a loooooooooong time (due to collapsing supply chains the world over) so longevity and reliability are at the tip-top of my list. 

Seriously considering 2014 Lexus IS 250 F-Sport.  

Right now they are too much, but once the credit market explodes and prices collapse I'll probably pick one up.  My XE2 has some 170,000 on the clock and while that makes the car still a baby -- the family is going to need a "get around" car when I am forced to bring them to Germany after the US turns into a warzone. 


Offthebeach's picture

The Feral Reserve will always supply credit so long as digital digits, wood pulp and state force exist.

Things break under stress. Europe's stress load is higher. The US is still fat and sloppy, and with Trump will be dumping, or at least decelerateing the rate of increase in assorted stress. Where this goes,,, China..Europe...who knows.

de3de8's picture

You mean a 7 year finance plan at 6.9% on a car that lasts 4 years doesn't work?

SAE6065's picture

Yeah baby yeah.  Hahahahaha.  I was in the car business for 9 years and 6 years was a bug stretch. 7 years or to the new owner 84 months is just insane. Your paying primarily 60 months of interest with hardly anything going to principal. Just plain out STUPIDITY on the owner. 60 months was considered crazy around 04 to 06 to finance. Then 72 months started to become the norm .  UGLY is all I can say


Normalcy Bias's picture

...when I am forced to bring them to Germany after the US turns into a warzone.

Things aren't looking so good in Germany, either. You'd better make sure that F-Sport is Sharia-compliant, because I don't think it is.

cheeseheader's picture

Or maybe even a Delta 88....

Normalcy Bias's picture

Freaking BEAST of a car.

I used to do 55mph 'reverse drops' in my Dad's '83 Delta 88 Company (Bank) Car, and just otherwise abused the shit out of it (Yeah, I was a bad kid).

That car took it all like a champ!

Lorca's Novena's picture

+1 for song reference!


So whats wrong with a 10 year car loan at 30% interest???????? 

Jim Sampson's picture

Cars! Get your cars here! No credit... shit, no anything!

glenlloyd's picture

You had to know this was coming, at least I figured it was starting to climb.

What I have heard is that people get about three go rounds with refi on negative equity and then they're through because the numbers don't make sense anymore for the financing firm. That is unless they're desperate to keep the payment stream moving in their direction. But I would imagine the interest rate goes up when you carry forward that much debt. It's hilarious, it just accumulates and keeps following the person around...lol

Rolling underwater vehicles forward into another new vehicle was a stupid idea, and people who did it are idiots. In fact buying a car on credit is about the dumbest thing you can do these days. You're underwater on day one and will be until the end of year two unless you have something decent saved to put down or your trade is worth something...which really they never are.

stupid people tossing their wealth down the toilet just so they can look like they're successful.

Scooby Doo's picture

And the sad thing is, some people who drive much older but still reliable vehicles, get pressured to not have a "junker" in the driveway. The two people, who shared their stories on the Dave Ramsey Facebook page, had neighbors speak to them about their old cars in their own driveways. They did of course tell the neighbors to mind their own business. Another person wrote that their own family started to ask them if they were OK financially because their car was so old.
So the pressure is there to look like you've made it with a fancy car . Along with the relentless advertising, it's no surprise that people find themselves in that unfavorable financial position of being upside down on their car loan.

bfellow's picture

Been driving the same 2006 Mustang for 10 years now. 50% down and triple payments knocked the shit out of any interest charges. Since then haven't needed to take it to the shop once. An engine line comes on and I'm at AutoZone borrowing the hand held diagnostic computer. Ford charges $150 to read the error code. I can now do it in 5 minutes with a couple Google searches. Saved me a boatload of money. Which I've just stacked into PMs. 

I'll let a fucking snowflake roll over into an 8 year loan on a used car, then pay out the ass to keep the car up.

Haus-Targaryen's picture

I cannot keeps cars that long. 

I have a 06 Lexus IS 250 right now with stupid miles on the clock.  Most reliable car I have ever driven.  It amazes me constantly. 

Pumpkin's picture

make decent coral reefs


Yeah, the fish like em.

GunnerySgtHartman's picture

Underwater ambulance-chasing tort lawyers do, too.  ;-)

PT's picture

But seriously, let there be no mistake.  What you are witnessing here is WEAPONIZED IDIOTS.

The smug AnarchoCapitalist insists that what happens between an idiot, the car yard and the bankster is none of his business, because he is not one of those three people.  Perhaps there exists a scenario in which the AnarchoCapitalist is right.  But that is not what we have right now.

The banksters can not force sensible people to become debt slaves.  But they can convince the idiots to become debt slaves. 

(And as per usual, I use the word "idiot" as a shorthand description of these people.  Some of them are indeed idiots.  Some are desperate.  Some of them are smart people who have been deceived.  Some of them have great talent, just not in the area of compound interest and Ponzi financing schemes, but I digress.)

The banksters can not force sensible people to become debt slaves.  But they can convince the idiots to become debt slaves.  And now the producers can sell for greater profit to the idiots.  So the sensible people must either pay the higher price or do without.  Either the sensible people become idiots or they become extinct.

Some people can live without cars.  Some are happy to tolerate other forms of transport.  Others have need for vehicles to carry their tools of trade or because their work location(s) are not frequented by alternative means / efficient timing etc etc.  Where the sensible can not compete, they must either become idiots or leave.

By allowing idiots to indebt themselves in order to purchase beyond their means, we are allowing a mismatch of social signals to contaminate society.  The banksters have allowed the idiots to project a greater social status than the sensible people through ostentatious displays that were earnt neither through hard work nor innovation, but merely through the adoption of Ponzi Financing schemes.  Artificially enhanced displays of social status always have and always will be with us.  But such things were sometimes kept in check as the idiots quickly became bankrupt and met the balancing hand of the repossessors.  But now the time lapse between the debt actions and the repossession consequences has been stretched out to a practical infinity, the damage to society is immeasurable.

It is not enough to say, "Well, I am safe because I am not an idiot.  This does not affect me".  The idiot and his banksters push prices artificially high so that all who try to enter the market are overworked for too small a return.  The Supply/Demand balance has been broken by the idiot and his bankster-enabled debt-money.  Earnt money can not compete against non-earnt bailed-out-bankster-enabled debt money.  The only options left are :  join the idiots, do without, walk away from the system or destroy the system.

BabaLooey's picture

I own my car.

A 2002

Own it.

Had it fixed recently.

Good for another 50,000 at least.

No GPS, no fancy dashboard with idiot screen, no gimmiky bullshit.

It's a car. 

I laugh at the idiots that go into debt buying the shit that comes out today.

bloostar's picture

Yup.. Got myself a high quality 10yo car, spent some money on it and it's now good for another 5 years I reckon. I used to yearn for the latest and greatest but as I get older, I laugh at those that seem to be literally falling over themselves to keep up with the Jones's (or Kardashians.. I forget).

DjangoCat's picture

Mine is 2004 Rav 4.  Works well, no gimmicks.  I am a happy man.

bloostar's picture

Unless you're Jimmy Bond,

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Nov 14, 2016 10:54 PM

I hate to say this but most Americans are brainwashed into being consumers. They learn jack shit about finance and business. Even fewer people learn how to delay gratification and save money. Saving is a habit best learned while young. I pity those that learn how to save in their 30s or 40s. If you haven't learned how to save by the age of 50? You are hopeless. Old dogs rarely learn new tricks. Of course everyone in the USSA thinks they are a special snowflake and unique.

Déjà view's picture

A few have 2 previous cars loans rolled into current loan. Wonder how many have not paid off a mortgage by age 75...

Adullam's picture

The first problem is borrowing money to buy a depreciating asset (vehicle). That is just plain bad economic sense.

One smart way to buy anything is to consider it in terms of hours (or weeks / months / years) needed to work to pay it off. Seeing things in that light is often a real eye-opener.

Creative_Destruct's picture

"...borrowing money to buy a depreciating asset (vehicle)"

Yes. Never have bought a new car. Buy them used & drive em' till they drop.

Come to think about it, the vast majority of our insane modern economic existence is based on the ignorant masses either borrowing to buy depreciating assets or borrowing for current consumption. This is why we have been headed for a day/year/month/decade/era of reckoning and have almost arrived.

Mr. Universe's picture

I would agree up to a point. Sometimes you just want a sweet new ride for a special reason or purpose. Granted my truck is used and going strong, as is my Yoda (195K). However 10 years ago the wife needed a new vehicle and we had some cash in the bank. We got a small 3 year loan and she paid it off in 2. With the 60/60/100 warranty, we paid nothing for over 6 years except oil changes and brakes. Now it's closing in on 122K after 10 years and should last until she retires.  It was the last time we buy a new car.

tarsubil's picture

The mattress store near me has 4 year financing. 4 year terms for loans on motherfucking mattresses people! How anyone can drive by that and not go completely bonkers from how crazy stupid we've become is beyond me.

Mustafa Kemal's picture

Lol, where did you finance your mattress?

Déjà view's picture

Stuffing $'$ under mattress is a relic of the past...new norm...stuff payment coupons under mattress.

tarsubil's picture

I didn't even know such a thing existed. Then about a year ago saw 3 year terms and now 4 year terms. Seriously? Is it going to go to 10 year term mortgages on fucking mattresses?

BlackSun59's picture

In my area Raymour & Flanagan now offers 7 year terms for furniture purchases.

Haus-Targaryen's picture

You can finance a $300 TV for 60 months at Best Buy now. 

NEOSERF's picture

All of this financing made sense because those that do it know that if they have to give it all up at some point in bankruptcy, they can reappear within a couple years and do it all over again...no credit, no problem!...live for the moment until the snowflake melts...

King Tut's picture
King Tut (not verified) tarsubil Nov 15, 2016 12:03 AM

Why buy a mattress when you can buy gold?

PT's picture

Silly, where are they going to put their gold if they don't have a matress?

Oh, whoops, forgive me, sorry, I forgot...  But hang on a minute, who can afford to buy a lake?

Adullam's picture

Every once in awhile society needs a great reset. Few people remember the great depression, (my parents were teens during that time), and so few people understand the concepts that a previous generation lived by. Basic stuff like:

1. Knowing the difference between needs and wants; and prioritizing even your needs.

2. If you can't afford it, then don't buy it.

3. Delayed gratification is a character builder and brings a more satisfying reward.

PT's picture

Preaching to the converted, but that is not how idiots think.


1.  Maths is hard.
2.  Everyone else has one, I earn roughly the same as everyone else, therefore I can afford one too.
3.  My advisors* tell me I can afford one.  Therefore I can afford one too.
4.  If I don't keep up with my social circle then I will be kicked out of my social circle.  I can't afford to be left behind.

* "Advisors" = banksters, car sales people, TV ads, other idiots - remember they are all idiots.

Note that if you can not solve problem 4 then you will never awaken the idiots to the other three problems.  There are several reasons why idiots exist, one of which is the extent to which they breed.

There will come a time where the average person looks down on anyone who has any visible signs of wealth.  It will come after the great collapse where the banksters, realizing that they can no longer continue the Ponzi, crack down on lending standards and go about the world repossessing every borrowed, indebted item which is not nailed down, in order to placate their own overlords.  At that point the unwashed majority will collectively recognize that all worldly wealth is purely the result of fraud and theft but on top of that, condition number two above will be broken.

This awakening will not be perfect - people still want to survive.

And so the cycle continues.

it aint paranoia if they really are out too harm you's picture

Some great advice already but some of the best advice:


"4.  If I don't keep up with my social circle then I will be kicked out of my social circle.  I can't afford to be left behind."


PICK YOUR FRIENDS WELL!  Few people over decades can withstand social pressure, so pick friends with your same financial mentality; and I mean a good financial mentality.  Give your friends grief for buying new cars or driving less than 10  years on a car. I'm a doctor and I always have the oldest car in the lot- the moment someone new opens up on me about what I drive I got the verbal 10 minute takedown practiced to an art form. Always hang with real people, not tools.

NEOSERF's picture

Well this is just un-American...if we all did this, GDP growth would be negative...no we need snowflakes to live for the moment and keep buying.  Can you imagine how long the payment terms would be for all this shit if we still made it in this country?  $30,000 mattresses, $100,000 cars, $3000 iphones....this is why the jobs ain't coming back.

DjangoCat's picture

Got that right.  We have a long way to fall before Amerika makes its own stuff again.

de3de8's picture

They have loans on tires too!