One-third of trade-ins in a new-car deal are underwater on their loans

Add that to the lengthened loan terms, and car buyers rolling loan balances over get deeper in debt with each purchase.

The financial media's been charting the steady increase of underwater trade-ins since The Great Recession. Here's a piece from 2009 about how suddenly skittish lenders didn't want to roll an old balance onto a new loan, so carmakers would offer rebates instead, helping the buyer pay off the old debt. At the time, in response to a JD Power executive saying, "There's always been negative equity," the Bankrate writer wrote, "It just hasn't always been such a big problem."

It's an even bigger problem now. Buyers financed roughly 86 percent of new car purchases last year, 43.5 percent of buyers brought a trade-in, and Edmunds reports that nearly one-third of those trade-ins were underwater. The lowest recent percentage of underwater loans was 13.9 percent in 2009, when lenders were tending their mortgage burns. The highest recent number — before the last few years — was in 2006, when 29.2 percent of auto trade-ins swam with the fishes. Bloomberg found that even as auto sales contracted last year, the auto loan market grew because banks and finance companies opened the vaults to riskier borrowers to keep revenue targets on track.

If there's any good news in the figures, it's that the percentage in 2017 isn't appreciably larger than it was in 2016. The bad news is that while the percentage has remained level, there's been an increase in the amount still owed on the average vehicle, from $4,075 around 10 years ago, to $4,832 in 2016, to $5,130 last year. From 2013 to 2016, the debt increase exceeded the growth in median income. Add that to the lengthened loan terms, and car buyers rolling loan balances over get deeper in debt with each purchase. Furthermore, because much of this issue boils down to the subprime customer, you get comments like, "Eventually they just hit the wall and are stuck in their vehicles. People would come in with $700 payments and $10,000 negative equity looking to lower their payments with no money down."

Market watchers don't have dire predictions for the sector yet, though. The auto loan market is but $1.2 trillion, compared to $9.2 trillion in home mortgages. The bonds backed by subprime loans aren't in danger yet, since they come with a great deal of price latitude and investor protection. But market watchers know this can't continue forever. The chief CIO at Arena Investors said, "Ultimately, when the overall fixed-income market has an issue, even if this is not the cause, car loan debt will likely suffer greatly."

Moody's analyst Jason Grohotolski put it more bluntly, with, "It has to stop, and it doesn't have a favorable outcome."

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