The Growing Problem of 'Permanent Car Loans': Why the Math of Car Buying Is Breaking Down
Longer auto loans and repeated trade-ins can leave borrowers rolling negative equity from one vehicle to the next.
TL;DR
- The average negative equity on trade-ins has risen significantly, with about one in four underwater trade-ins now carrying over $10,000 in negative equity.
- Longer loan terms, with many buyers taking out 84-month or longer loans, contribute to negative equity as cars depreciate faster than loans are paid down.
- Buyers often focus on monthly payments rather than the total cost of a vehicle, making it easier to justify longer loans and roll negative equity into subsequent purchases.
- This cycle can lead to 'permanent car debt,' where individuals continually finance vehicles and may never fully own them outright.
- Options for buyers include keeping cars longer to pay down debt, considering leasing if frequent upgrades are desired, or consciously avoiding rolling negative equity into new loans.