Don’t scrap your old car yet says leading experts
The consensus on whether it is economically viable to keep your old car running has always been murky, but a study presented by Automotive News has concluded that buying a new car could be a financially irresponsible move in the current climate.
With the length of loan terms increasing as a means of keeping monthly payments down, alongside an overall increase in transactional prices, there has been a clear increase in negative-equity across the board over the last year. This is partly due to the substantial increase in borrowing since the 2008 recession, with around 85 percent of new cars on the road under finance agreements.
Negative-equity amounts have, on average, exceeded $4,000 since the third quarter of 2013 according to the news site, with the average negative-equity value per person now around $5,195. This is in stark contrast to the two years post-2008, where negative-equity fell due to customers holding on to current vehicles as a lack of funds and a reduction of financing options held them back.
Longer auto-term loans could be to blame
Melinda Zabritski, senior director of automotive finance at Experian, told Automotive News that there has been an increase of demand for 73 – 84 month loan terms. ‘Years ago, when you saw lenders starting to move into that category, they were on the low end of it’, says Zabritski. ‘Now we’re seeing a shift within that category of more loans truly being written at 84 months.’
While consumers take out extended loans to reduce monthly costs, they generally trade them in or sell within three years, thus increasing the amount of negative-equity they hold. Most will take out a 6-year loan on a new car, but will have come accustomed to purchasing a new car every 5 years. This is causing a ‘vicious circle’ according to Ivan Drury of Edmunds.
Cheryl Miller, vice president of Dealertrack, explained the issue in more detail. ‘Think about the way the principal and the interest over a 60-month loan, or 66, or 72 (month) loan. The equity the consumer is building from a principal perspective is lower than it is on a short duration loan.’
Rising car prices also impacting negative equity
With falling gasoline prices and lower unemployment rates, there has been a nationwide increase in the demands for trucks and SUVs over the last year. As such, there has been an overall increase in the transactional price of new vehicles.
‘A lot of people are trading up to more expensive vehicles. That is part of the problem,’ says Drury. An increase in costs has seen finance terms increase to remedy this. But it’s not all bad news according to Zabritski.
Negative-equity ‘going to make used vehicles more affordable’ says Zabritski
Industry experts have suggested that consumers stop trading in their current cars still under finance agreements to avoid further increasing their levels of negative equity. If households have no option other than to buy a vehicle, they should either pay off the current loan first, or consider cheaper alternatives such as purchasing one of the many used cars on the market.
Purchasing a used car can be both cheaper, and considering scaping a car can cause huge amounts of carbon emissions, it seems to be more environmentally friendly, too.
