Banks SCREWED The Car Market (INSANE DATA) | Episode 943
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Term
negative equity
Negative equity means you owe more money on your car than it's currently worth. For example, if your car is worth $10,000 but you still owe $16,905, you have negative equity of $6,905.
Term
used car shortage
A used car shortage means there aren't enough used cars for people who want to buy them. This can make prices go up because more people are looking to buy than there are cars available.
Term
new car shortage
A new car shortage means there aren't enough new cars for people to buy. This can happen if factories can't make enough cars or if many people want to buy them at the same time.
Company
Edmunds
Edmunds is a company that helps people learn about cars. They provide information on how much cars cost and reviews to help you decide which car to buy.
Term
loan to value ratio
Loan to value ratio shows how much money you're borrowing compared to how much the car is worth. A higher ratio means you're borrowing more money relative to the car's value, which can be risky for lenders.
Term
average car payment
The average car payment is how much most people pay each month for their car loan. It can change depending on how much the car costs and the loan details.
Car
Mazda Cx5
The Mazda CX-5 is a type of SUV that is smaller than a full-size SUV. It's known for being fun to drive and having a nice interior, which makes it a good option for people who want a practical vehicle.
Car
Honda Accord
The Honda Accord is a popular car that many people choose because it's comfortable and dependable. The 2024 version has new features that make it even better.
Car
Honda Pilot 2015
The Honda Pilot is a family SUV that can carry a lot of people and stuff. The 2015 version is known for being safe and comfortable.
Term
finance or lease
Financing is when you borrow money to buy a car, and you pay it back over time. Leasing is like renting a car for a few years, and then you give it back instead of owning it.
Term
full coverage insurance
Full coverage insurance means you have a type of car insurance that covers a lot of different situations, like accidents and theft. It's usually needed if you're getting a loan to buy a car.
Term
auto loan
An auto loan is money you borrow from a bank or lender to buy a car. You pay it back over time, usually with extra money added for interest.
Term
insurance payments
Insurance payments are the money you pay every month or year to keep your car insurance active. The amount you pay can change based on different factors, like what kind of car you have.
Term
trade-in
A trade-in is when you sell your old car to a dealership to help pay for a new one. They will give you some money for your old car.
Company
CarEdge.com
CarEdge.com is a website that helps people buy and sell cars. It has tools to find out how much your old car is worth.
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and this is Car Edge live for Wednesday,
October 15th with your host.
Both of us here in Venture City, New Jersey,
me, Ray, sitting in a chair and well, Zack,
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All right, folks, we're going to talk about how banks
have screwed the car market
and holy cow, do we have some insane data.
Before we do, a friendly reminder
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Now, the big data story that I wanted to talk about.
Please don't share with me.
Underwater and sinking deeper,
Edmunds just released the latest data
on the negative equity crisis in the United States of America
and a few key points to hit on here.
Yeah.
Average amount of negative equity.
I'll just take a second.
Explain to us what negative equity is.
Let's just start.
Okay, negative equity.
Let's just say you have a vehicle that you own
that's worth $10,000.
Unfortunately for you, you still owe $16,905.
That difference between what it's worth
and what's owed, that's negative equity.
That's not something you ever wanna be in possession of.
Okay, so negative equity happens fairly often.
When you sold cars in your career,
it would be frequent that someone would come in
and they would owe more than what their vehicles currently worth.
That actually went away for the most part during the pandemic
because there was a used car shortage,
or there was a new car shortage, excuse me,
which saw used car prices go up significantly.
That being said, we are no longer in that dynamic
and Edmunds does a great job every single quarter
providing us with the latest trends in negative equity.
We are now up to that.
Yes.
$6,905 is the average amount someone is upside down
when they are in a negative equity position.
So we'll get into the data here in a second.
How many people are actually upside down on their auto loans?
But when someone is upside down on their auto loan,
it's not average.
Yeah, it's not that they're on average upside down
by a grand, two grand, three grand.
They're upside down by almost $7,000, meaning.
Yes.
If they do not bring $7,000 to the dealership,
let me help you.
They're not bringing $7,000 to the dealership.
For sure, for sure.
But if you do not show up with an additional seven grand
and you go to sell your car to a car dealer,
you're going to have to write that check for $7,000
or roll that negative equity in to a new auto loan.
This is a huge milestone in the loan crisis
what banks have enabled
and really it ties back to loan devaluations as well.
So what did you think when you saw this $6,905 amount?
I thought that's an astronomical amount to be upside down.
If you assume for a moment that at least you could
assume for a moment when it was 72 months financing
was the norm, which was longer than it should have been,
but that was the norm when I was still on the business,
that for every $1,000 financed,
it would add $20 to your monthly payment.
So if that's still relatively close to what it is today,
if people are walking in on average with $7,000
of negative equity,
that they are then going to roll into their next car loan
if they can, if the bank will assist them with that.
Which if you don't mind,
tie back to the Wells Fargo story we talked about last week.
Wells Fargo now, if your credit score is above
what was it, $5.50, $5.40,
they'll approve you for up to 150% loan to value ratio,
which means you could get approved for an auto loan
that you previously shouldn't have been
while rolling in your negative equity.
But I think you're in the point.
But the point here is that that $7,000 of negative equity
is adding $140 a month to your car payment.
The average car payment today is about $760 for a new car.
So add $140 to that and that takes you up to $900.
And it's only, you're paying $140 a month more
than the person that walked in without negative equity.
Simply because A, you want to get out of your car
sooner than you should.
B, you haven't paid it off enough.
C, you're just too damn impatient to keep it
as long as you perhaps you should.
D, the banks are enabling it.
They're giving you an approval to roll in
that negative equity to get you into that new vehicle.
Now, a few more data points here, Dad.
I'll read these through to you
since you're back in your lounge chair.
We are up to 28.1% of new car purchases
having negative equity.
That's up from 26.6%.
The prior quarter and 24.2% the quarter before that.
So we are seeing a sharp uptick
in the amount of vehicle transactions
that have negative equity.
We're back up to almost a third of them
having negative equity.
Like we said a moment ago, $6,905 is the average amount
that borrowers owe more than what their current vehicle is worth,
which is the highest Edmunds has ever seen.
And now, Dad, nearly one in three of those vehicles
that are, those car owners, excuse me, that are underwater
are between $5,000 and $10,000 upside down.
We have nearly 25% are upside down
by more than $10,000 when they go to get into a new vehicle.
And 8.3% upside down by more than $15,000.
Nearly one in 10 of those that have negative equity today
have over $15,000 of negative equity,
meaning that if they had a $10,000,
I can't even do the math with a $10,000 auto loan
because it's not a big enough number.
Well, you could, they owed 25 grand.
But I'm saying the loan's only worth 10 grand.
The vehicle's only worth 10 grand.
Imagine if a vehicle were $10,000,
your auto loan that you're currently paying off is $25,500.
Which, to be clear, is 8.3% of people
that Edmunds brought into that.
That is staggering.
Well, the thing to me that's really staggering about that
is, A, the banks are going along with it.
So as I like to say, the banks are complicit
in what we see happening in the credit market at the moment.
And the other thing is that the dealerships
are so short-sighted, so blinded by short-term profit
that they are allowing themselves
to help customers get into this position.
Which means those customers can't be customers again
because you can't roll $15,000 of negative equity
into your next car loan.
And honestly, those customers who are thinking
that they could and they should,
they should seek help of some kind,
whether it be financial guidance help,
whether it be psychological guidance help,
because there is nothing going on in that brain up there
that is making any sense to think,
well, I'm just gonna keep getting further and further
and further in debt.
And I will continue to extend the term
at which I'm agreeing to pay it back,
even though I have no intentions
of ever keeping the car that long.
So let's look at that Wells Fargo story again
one more time in the context of what we're talking about today.
And then I wanna share some more data
on auto loan delinquency.
So car dealership guy posted this a little over two weeks ago
and internal memo obtained by CDG news shows
that Wells Fargo is piloting a new program,
borrowers with FICO scores above 540
can get approved for loans up to 150% of loan
to value ratio.
Again, what this means is that a vehicle
may only be worth $10,000.
But the bank will finance 15 for you.
$15,000.
Already burying your ass
the minute you signed on the dotted line.
Yeah.
And that's a new program for people
with FICO scores above 540, not 740, not 640.
Yes.
540.
Yeah, that is, if there is no way
you can convince me
that a bank that is willing to do that
is not complicit in putting people
into disastrous credit situations.
That the bank knows better, okay?
The buyer at the bank who is approving it knows better.
The dealer that is assisting the customer knows better.
The only one that doesn't know better is the customer.
Because, well, maybe they do know better,
but all they can think about is,
well, there's a different car
at the end of the line for me here.
So I think, yeah, it sounds good.
I received an email earlier this week
from someone who found herself in a situation.
Wait, can we do manual solo time?
Give me one second.
Yeah, so I received this email
and the customer was in a situation
where they had a Mazda CX-5 that they liked.
Their car payment was $625 a month
and they had three years remaining on it.
They were trying to figure out ways
to lower their payments,
whether it be cable bills, cell phone bills, whatever,
internet bills, car loans.
So the thought was that we will trade in this Mazda
and we will get a new Honda and we will lower the payment.
And the goal was to lower the payment to $475 to $500 a month.
When everything was all said and done,
the customer traded in the Mazda
that had three years remaining on it at $625 a month,
traded in that Mazda for the Honda, a base model Honda,
walked out of the dealership with a new payment
of $618 a month, saving a whole $7 a month,
and committing to an 84 month, no, yeah,
an 84 month loan, a seven year loan term, 84 months.
And I get an email saying, well, can you help me?
I don't think I accomplished what I was trying to accomplish.
No, you got so much further away from that
and you hate the car and you wanna get out of the car.
What do I do?
How can you help me?
How can you assist me?
So the bank knew it, the dealership knew it,
the customer didn't quite understand it
and she is probably one of those 24.8% of the people
that have negative equity in excess of $10,000.
What do you do?
My only suggestion to her was,
perhaps if the bank will agree,
look at some type of three year lease
so that at the end of three years, you can start fresh.
Now, dad, you said something earlier
that I wanna just point out is in contradiction
with Wells Fargo, Wells Fargo's quote here, dad,
quote, Wells Fargo is committed to responsible lending
and providing our customers with affordable solutions
for their transportation needs.
As part of that work,
we are continuously testing
potential lending solutions in the market.
Now, to build on top of this,
I recently learned about a company called Yendo yesterday.
They raised $50 million, $50 million
in their series B financing
because they've done some financial engineering here
where you can get a credit card that is backed
by the equity of your car,
which we know there's a negative equity.
Well, there's about 72% of the people out there
that might have some equity.
I bring this up in the context
of what I'm sharing here from Wells Fargo
because there are these financial institutions
that look at what they're doing.
We're gonna talk about Yendo more in a sec here
as it's mind-boggling to me,
but they look at what they're doing
is actually like a real positive for the industry.
And let me say this,
and it was such corporate BS nonsense.
They know that they're not doing anybody
on the consumer side of things a favor
when they take somebody that doesn't deserve or qualify
for 150% loan to value ratio
and extend those type of terms to them
because that person has already proven
that they can't handle their credit.
Their credit history is such that
their credit score is subprime.
So we already know they can't handle their credit.
How are you being responsible as the bank
to say, you know what,
you deserve a third or fourth or fifth chance.
You think you were buried before?
We're gonna show you, you had no idea what buried was.
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So what do you make out of this Yendo company?
So again, just to describe it briefly here,
let's go to their website
and I'm gonna go to how it works
and we pull it up on the screen.
How it works, applying for the Yendo credit card is simple.
Learn how Yendo lets you use your car
to access up to $10,000 in credit.
So here's how it works.
If you're making payments on your current car,
you get Priapu.
Priash.
You transfer your auto loan to Yendo
and then you access your money.
The whole idea here, Dad,
is that you're in an equity position on your vehicle.
So you have this 2024 Honda Accord
with 112,000 miles on it.
That's worth $8850, $80,850.
Well, they'll let you take out credit against that vehicle.
It almost is like a home equity line of credit
if you look at it similarly.
The issue here is,
the car is depreciating.
And as we look back at Edmunds,
the share and average amount of negative equity chart
is going up into the right, not down into the right.
So I was confounded when I saw that
there's a company out there that again,
lets you get a credit card
that's backed by the equity of your car loan.
Here's the difference between getting an equity loan
on a depreciating asset like an automobile.
That's movable, drivable,
harder to find when it's kind of be reposet,
as opposed to taking out a home equity line of credit
on your house.
And the vast majority of homes appreciate in value
are pretty much stuck in the ground where they are.
Okay, the bank knows the exact address
and it's gonna be there cause it ain't on wheels.
So it's just, when you asked me about it yesterday,
and my response was at first blush,
it looks like, okay, somebody can utilize the equity
in their car if they needed to.
But if you look just a little below the surface,
this is another way to bury people who should know better.
The last thing you wanna do is if you have any equity
in your vehicle is to take that equity
and use it as a line of credit for something else.
You are just exacerbating whatever situation you are in.
I received an email from Antonio,
one of our, about GoFundMe,
and the CEO at GoFundMe said,
there are more and more and more of our customers
using GoFundMe to raise funds to cover their groceries.
So, I think when you hear it-
Why wouldn't I get a credit card backed by my car equity
to get my groceries that I pay on Klarna
and 12 installment payments over the next year?
Why wouldn't you?
Especially when Wells Fargo will approve me
for that next auto loan,
even though the cycle of financial engineering here
is devastating and where we see it show up
is in the Edmunds data.
Every quarter it gets worse in the Edmunds data.
And I have more data I'm gonna share in a minute here
that shows the negative equity side,
or excuse me, the auto loan delinquency side even worse.
It is a way that we are perpetuating
the continued downfall of a huge swath of Americans.
We are savoring them with debt,
making it easier and easier to get deeper and deeper into it.
Because apparently that's the only way
we can keep the Dan economy running, okay?
Is to just have people take on more and more debt
that they shouldn't have.
And the people don't seem to understand it
because most Americans are financially illiterate
and have no idea as to what it is
that they're doing to themselves
until after they've done it to themselves.
You have the banks that are helping to facilitate it.
You have new players like Yendo who are saying,
well, there could be some equity
in some of these cars out there.
Why don't we offer that to people?
And I have no idea what rates.
I didn't look at what their rates are,
but whatever it is, as you said before,
it's a depreciating asset.
And I guess if you take the equity out
and get a credit line,
and when you have that major repair that's needed,
well, you already have the Yendo credit card to pay for it.
There's just something wrong
when the entire economic cycle
is based on taking advantage of people.
And I guess the concept is
that if the population keeps growing,
we can do this forever.
But the rate of growth of the American population is slowing.
So at a certain point where the house of carbs
is gonna come tumbling down.
All right, so here's some interesting data
that shows what's happening on the auto lending site
in a little bit more detail.
This was posted over on CDG's website.
This number, dad, 6.43% of subprime auto loans in August
where at least 60 days passed due.
This is a record.
This is as high as we've ever seen.
JD Power showing that nearly one in seven car shoppers
now have a credit score below 650.
That is also a record.
That's the highest share of lower credit borrowers
taking out loans since 2016.
That one so doubts me a little bit.
We have declining credit scores
and quality of shopper from a credit perspective.
And they're still getting approved for those loans,
obviously.
Yeah, because that's how the banks make their money.
That's how dealerships make their money.
That's what keeps the economy running
is to keep supplying the people with credit
that they cannot either handle or don't deserve.
As you can't convince me,
somebody that has a credit score of 540
should be able to get 150% of loan to value.
That would be if they were looking at a $10,000 car
that Wells Fargo would lend them $15,000
on that $10,000 car that is depreciating every day.
There is no way that 50%, that extra 5,000,
that that gap ever gets closed
because the car is depreciating faster
than they're paying it down.
So it's just, it is the whole concept,
the whole construct here just seems to be,
let's take advantage of as many people as we can
to keep this facade going.
And then let's hope that there's just another influx
of credit worthy people to come along
so that we can continue to do it.
But at a certain point,
at a certain point, you just have to look at it
and you gotta go, this is 2008 all over again.
Okay, and I know that we have short memory.
2008, 2009, 2010, 2011, 2012,
it was ugly, okay, it was ugly.
It was not a good time.
It was hard to buy things.
Credit wasn't available because I don't know,
we put constraints on what banks could do
and how they could lend.
We actually, I don't know,
checked that the banks were in compliance
with loan guidelines and things.
Yeah, that was nearly similar,
what's happening then.
And we've kind of lost sight of that
and we're falling back into the same trap.
And my guess is there's only so much the Fed can do.
At a certain point, you just run out of money
and if we think inflation is bad now,
we'll wait on that cup of coffee at Starbucks,
it's $23 and nobody's showing up.
The big story for us in our communities,
you have to take responsibility for what you're doing.
If you watch us talk about this stuff every single day,
if you watch the Car Edge main channel,
if you're informed and empowered,
you have to take responsibility
because just because you can get approved for something,
doesn't mean you do it.
And you used to give that line, right?
What was the line you gave yourselves people to use?
Or you used on customer.
So it was like, well, the bank,
you know, the bank wouldn't have approved you for it.
If they didn't think you could make the payment.
Which is BS, unequivocally, it's BS.
Wells Fargo telling you that you can be approved
for up to 150% but your credit score is 541.
Does not mean you should take on that burden.
No. But the bank wouldn't have approved you
if they didn't think you could do it.
No, the bank's drunk right now.
That is, the bank is drunk, it has bad judgment.
Okay, the buyer was snorting cocaine.
No, that's in his opinion.
I went drunk, which is beagle.
He went cocaine, which is illegal.
Whatever.
Because the bank has bad judgment,
doesn't mean you take that on.
So I think there's a huge angle here
which is consumer response.
So if I hear you correctly,
just because the bank has bad judgment,
doesn't mean that you, you as the consumer
should equally have as bad a judgment.
Yeah.
I appreciate that.
And the orange rubber ducky also resonates
with the bank is drunk.
I really do think that is like the way to describe
our current automotive lending ecosystem.
And you and I looked at it yesterday, Dad.
Amidst all that we've said,
it was gonna go on at the Fed funds rate
and things like that,
what do we see new car interest rates go?
It went up, the average interest rate for a new car auto
went up to, what was it, like 9.74%?
Yes.
So it's like rates are supposed to come down,
access to credit should be, you know, smarter
because we've already seen delinquencies go up.
No, we're seeing rates go up.
We're seeing access to credit be more accessible
than ever before.
Look, but the average rates go up
because the average person applying for credit
has a lower credit score than they ever have.
Okay, so that it kind of sort of makes sense
that the rates, the average new car rate today
would be nine, I think it was 9.47%.
Yeah, I mean, why wouldn't it be?
Now that's not to say that people
that have exceptional credit
can't get lower rates, they can.
That's not to say that there aren't specialized rates
out there from captive lenders
that people with good credit will qualify for.
But the vast majority can't and won't.
Let's switch gears, Dad.
Let's spend a couple of minutes here.
I have an idea.
We're gonna help Claudia out really quick.
Maybe tomorrow's show can just be car buying help
on the couch, couch bar buying corner, couch corner,
car buying help, couch.
Whatever.
We'll workshop the name,
but let's see if we can help Claudia out quickly here.
I need some advice.
I'm getting ready to buy or lease a car.
My Honda Pilot 2015 is on its last leg.
I'm a single mom and I'm stuck.
Should I finance or lease?
I don't want to put any money down.
Now what types of, so I think I'm gonna just pause it here,
Claudia, it's hard to give you advice
because there's a lot of missing variables
and pieces of information.
What are the pieces of information you would need from Claudia?
And then how should Claudia think about this?
Like what are the things she should be thinking
about to help inform her answer here?
Well, first of all, Claudia needs to do
all types of research.
What do I mean when I say that?
Well, Claudia, whether you buy it or you lease it,
whatever it is that you're going to look at,
you're going to have to insure it
because, well, you're using somebody else's money to get it.
So they're going to require full coverage insurance.
So I don't know, check with your insurance company,
check with your insurance agent,
give them an idea of what vehicles you might be looking at.
So he or she can give you a quote
as to what your new insurance rates might be
on top of what your auto loan would be.
And on that front, we've seen,
I mean, I've seen insurance payments
that are hundreds, multiple hundreds of dollars a month.
It can be as much as your car payment is.
And Claudia, we have resources back on CarEdge.com.
You can click on research.
You can type in any, whoops,
you can type in any vehicle up here
and it'll show you what the estimated insurance costs are.
But to my dad's point, obviously getting a quote
is definitely the move as well.
But just wanted to call that out.
Yeah, and as-
So research on costs, like your little costs.
Yes.
And then I'm assuming that the Honda
that's on its last legs,
you're probably going to trade it in.
Go online, get some values as to what-
Deal with solution at CarEdge.com slash sell.
Use that.
We have a guide on how to get the most for your trade-in,
which walks you throughout a sell-it.
So yeah, look at that.
And you need to know what your credit score is
and what type of credit you would qualify for.
And I'm sorry to hear you have zero to put down,
but not having any money to put down other than the trade
is going to impact what your payment is.
I don't know what type of payment range
you want to try and stay in as to what's affordable for you.
So there's all types of missing information,
but you can do some of the research prior
to ever walking into a dealership
so that you have at least a better understanding
of what you're looking at.
Yeah, I think the theme I'm getting from all that is,
do your research to understand the whole task
of what you're going to get into.
Don't just get enamored with a low payment.
There's other aspects that are going to add in.
There is no excuse in today's world
with the advent of the internet.
And people like us that are providing the information
that one would utilize to make a more intelligent decision.
So avail yourself of what's out there
so that you can better understand
what you're about to embark on.
Absolutely, and as a friendly reminder,
we can help you out with our car buying service as well.
So if you go to caredge.com
and click on car buying services up there
in the top navigation, you can now meet the team, folks.
Meet the people that are actually working all of these,
working with all these customers.
We've got so many incredible folks,
48 years of experience in the car business, Dad.
So many awesome people on our team that you can work with.
So Claudia, I don't know if that's an option for you,
but it's something to consider as well.
Yeah, that's called a show for today.
Tomorrow we might have,
I really feel uncomfortable saying this, couch edge.
Yeah, we got to come up with it.
We got to come up with it, yeah.
Edge on the couch?
No, edge of your seat.
Edge of your seat?
We'll keep you on the edge of your seat tomorrow.
Well, we'll be back from the couch and the chair.
I like this setup.
I did not bring a single pair of pants though on this trip.
Well, the good news is tomorrow
it's supposed to go up to 60.
No, no, I mean, I knew we were going to be inside
and I'm going to run on the boardwalk,
so I just brought shorts.
I was just going to bring a towel.
I can't help you with that
because my waist is a lot larger than yours.
Yeah, so anyway, folks will get to see more
of my compression shorts that I wear under my shorts.
Anyway, we'll be back tomorrow.
I do believe.
If we can help you out with anything, caredge.com.
Thank you, Dad, as always.
Thank you.
See you all back here tomorrow,
everybody from the couch and the chair.
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About this episode
The discussion centers on the alarming rise of negative equity in the car market, with average negative equity reaching $6,905. The hosts analyze how banks, particularly Wells Fargo, are enabling this crisis by approving loans that allow consumers to roll negative equity into new auto loans. They highlight the implications for consumers, including higher monthly payments and the risk of deeper financial trouble. The episode also touches on new financial products like Yendo, which offer credit backed by car equity, raising concerns about the sustainability of such practices.
Original notes
Today on CarEdge Live, Ray and Zach discuss the latest auto finance data and how it is harming consumers. Tune in to learn more! Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com
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CarEdge Live
Ray and Zach Shefska, Bleav
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31:11