As interest rates continue to climb and car values decline, individuals with auto loans find themselves facing mounting challenges. The combination of increasing debt and diminishing car values is creating a concerning situation for those who owe more than their vehicles are currently worth.

Escalating Negative Equity Woes

Recent data highlighted by Bloomberg reveals a worrying trend for car buyers with negative equity, indicating that they owe more on their auto loans than the current value of their vehicles. In November, the average negative equity reached $6,054, marking the highest amount since April 2020, according to information sourced from the Edmunds.com website. This figure represents a significant rise from the average negative equity of $5,300 reported in 2019. Joseph Yoon, a consumer insights analyst for Edmunds, pointed out that the situation is exacerbated by a combination of unfavourable car loans, high vehicle costs, and historically elevated interest rates.

Soaring Interest Rates Impact Auto Loans

NerdWallet, utilizing data from credit reporting firm Experian, emphasizes the impact of rising interest rates on auto loans. In the third quarter of 2023, the average interest rate stood at 11.35% for used cars and 7.03% for new cars. This surge in interest rates adds financial pressure to individuals with auto loans, making it more challenging to keep up with payments and contributing to the growing negative equity problem.

Depreciating Asset Values Compound Debt Woes

The decline in the value of cars, particularly used cars, over the past year further compounds the challenges faced by those with auto loans. Data from the Manheim Used Vehicle Value Index indicates a 5.8% decrease in the cost of all used cars in November compared to the same month the previous year. Bloomberg suggests that this essentially means Americans with auto loans are paying for assets that are steadily depreciating, exacerbating the financial strain on these individuals.