“We have seen an appreciation [des prix] exceptional during the period when consumers were buying these high-priced cars,” said Daniel Ross of Canadian Black Book of the auto market during the pandemic years.
Global supply chain disruptions resulting from the pandemic left the auto market with low inventory — and, coupled with strong consumer demand, car prices soared, Mr. Ross recalled.
Some of these issues have since started to ease, allowing prices to fall, but that hasn’t stopped the fact that some consumers owe more on their auto loan than the car is currently worth.
This is called negative net worth, or being underwater.
It’s a depreciating asset, so for those who bought their car when prices were high, their “vehicle will continue to lose a lot of value because it was probably overvalued at that time,” he said. Mr. Ross said.
On average, people who were overwhelmed saw their negative car equity climb to a record high of US$6,255 in the second quarter of this year, up from US$4,487 in the second quarter of 2022, according to a July report from the Edmunds automotive retail platform.
“Working with the Devil”
“If you’re in a negative net worth situation, it’s not easy to get out of it,” Ross said.
For motorists in this situation, it’s best to drive that car until the end of its useful life and continue repaying the loan, he argued.
“It’s wiser to work with the devil, so to speak, rather than embark on something else – a new scenario,” such as trading in or purchasing a new vehicle.
Ben Mayhew, a Halifax-based financial planner and founder of Aergo Financial Planning, argued that negative net worth is usually resolved when left to its own devices.
When a driver stays the course – keeps the car and pays off the loan – the value of the loan will balance out with the value of the car at some point, Mr. Mayhew argued.
But if a motorist needs to get out of negative equity, Mr. Mayhew suggests refinancing the loan at a lower rate. Many people took out loans with higher interest rates during the great supply crunch and rising interest rates, he pointed out.
“It will be beneficial to both refinance at a lower rate as well as a shorter term … to reduce this financial stress,” Mr Mayhew said.
Defaults increased in the second quarter of 2024 for both bank and non-bank loans, an Equifax report showed. Missed payments on bank vehicle loans were at their highest level since 2019, while the 90-day balance default rate for non-bank loans was up 26.8% from a year ago. is one year old.
If refinancing isn’t an option, car owners might consider paying off the loan more quickly and narrowing the loan-to-equity gap, although Mayhew acknowledges this can be difficult because many People also face the high cost of living.
While it’s not ideal, Mayhew said drivers can consider trading in their vehicle with negative equity for another car and rolling the current debt into the new loan.
“You have to be careful not to have a perpetual cycle,” warned Mr. Mayhew. He added that the new vehicle payment plan should not be based solely on what the driver can afford.
Avoid the pitfalls
Instead, a driver needs to be aware of the price of the car, the negative equity built into it, and what that’s going to look like – not just today, but over the life of the loan and the vehicle, Mr. Mayhew said. He suggested opting for older vehicles that are already past the steep depreciation curve.
“Being underwater with a new car leaving the dealership is definitely a difficult situation,” he said. It’s best to buy a new car with as large a down payment as possible to avoid racking up interest charges on a depreciating asset – and to avoid negative equity issues.
Mohamed Bouchama, consultant with the non-profit organization Car Help Canada, suggests not falling into the trap of tempting leasing and financing advertisements to avoid the risk of finding yourself underwater.
“If you can’t afford it, don’t buy it, buy something cheaper,” he argued.
Mr Bouchama said the golden rule to avoid negative equity is to not exceed a five-year term for financing, or a three or four year term for leasing, and to budget taking into account the other related costs, such as gas, insurance and maintenance.
