Negative equity means you owe more money on your car than it is actually worth. This can make it hard to sell or trade in your car without paying extra.
A trade-in is when you give your old car to the dealer to help pay for a new car. The dealer decides how much your old car is worth and subtracts that from the price of the new one.
If you owe more money on your car than it's worth, that's called being 'upside down.' It can make it hard to trade or sell your car without paying extra.
When you borrow money to buy a car, you pay it back over time. If you take a long time like 7 to 9 years, your monthly payments are smaller, but you might pay more money overall.
Bait and switch is when a car dealer shows you a cheap car to get you interested but then tries to sell you a more expensive car or add extra costs when you get there. It's a trick to get you to spend more money.
Honda is a car company from Japan that makes cars known for being dependable. They try not to sell too many cars to rental companies because it can make their cars less valuable later.
Toyota is a big car company from Japan that makes cars known for lasting a long time. They sell many cars to companies that use them for business purposes.
Residual value means how much a car is expected to be worth after you finish leasing it or after some years of use. If a car keeps its value well, it costs less to lease.
The Porsche Cayman GTS is a fun sports car made by Porsche. It has a powerful engine placed in the middle of the car, which helps it drive really well and feel sporty.
The Nissan Rogue is a small SUV that many people use for everyday driving. It's good for families and saves fuel.
LIVE
It's noon here in Ventner City, New Jersey, on our nation's capital, Washington, D.C.,
and this is Car Edge Live for Wednesday, March 4th with your hosts, me, Ray here, and Rainey
Ventner, and Zach sitting in front of his bike in Washington, D.C. How are you feeling today,
handsome? I'm feeling much better, Dad. Thanks so much for asking, and thanks everyone for tuning
in. Today is another day of Car Edge Live, and holy cow, Edmunds is putting the entire U.S. economy
on alert, Dad. No, seriously, the latest data from Edmunds that we're going to jump into here in a
second about negative equity is damning, alarming, concerning. It doesn't even matter what word you
want to use. It is astronomical what Edmunds is reporting on, but before we turn our attention
to the data from Edmunds, we need to spend a moment talking about the sponsor of today's program,
that would be CarEdge.com. For those of you that are unfamiliar, my dad and I, for the past six years
with our incredible team, have provided card-mining services that help you take care of research,
dealer outreach, and even negotiation. We learn what matters to you. Contact dealers compare
real offers and help you get the best deal without the stress. We still have a new product in beta
that we're seeking your input on Car Edge dealer ratings and dealer reviews. We appreciate everyone
that has shared their feedback. Come check out the Car Edge dealer ratings interface. We need your
input on it. If we can help with anything, check it out, back at CarEdge.com. Pops,
you ready to jump into the numbers here? They are alarming.
What makes you say that the average person that has negative equity today and that 29% of all
people who are trading in their cars are the proud possessors of negative equity?
The average amount of negative equity is $7,214, which is up from $6,900 in the third quarter.
It seems to indicate to me that negative equity is going the way we typically want charts to go
up and to the right, but when it comes to negative equity, we want it to go down and to the right.
Pops, I need you to start simple here for us all. What is negative equity and why is it so concerning
that admins with their most recent data that they have put out is now saying that we have the highest
level of negative equity than ever before? What is negative equity and why is that a concern?
Not only for car shopping, but I put US economy. Dad, why is this a red alert for the whole US
economy? Well, negative equity is if let's say you have a vehicle that you own and you're still
making your car payments on it. Let's say the value of that vehicle is $10,000. Negative equity
of $7,214 would indicate that you actually still owe $17,214 on that $10,000 vehicle.
Now, why is that a bad thing? Typically, you want to own things that go up in value or that are worth
as much as what you owe on them. This is a situation where you owe much more than its
actual value. Let's lead with the uppercut, Dad, or the right hook. Why is this a bad thing? Because
if you want to sell that vehicle, you have to make up the difference. That is why it is a bad
thing. What percentage, Dad, of consumers out there today that are in a negative equity position
owe more than $10,000 than what their vehicle is worth? What percentage?
What was it? 25%, I think? 30%? I forget. What was it? 29% of people out there right now that
have negative, excuse me, 27% of all underwater new vehicle buyers carried at least $10,000 in
negative equity during the fourth quarter, according to Edmunds. Dad, what's the issue with that for
the US economy? If my car gets totaled, I'm upside down by more than $10,000. That's called a
deficiency balance. Someone has to make that up, especially if I don't have gap insurance.
I want to sell my car and buy a new car. I want to sell my car and actually no longer have a car
payment. Whatever the situation is, $10,000 and more of upside down negative equity is $10,000
you have to show up with to get out of that. That's why this is putting the economy on. That's why
this is bad. That's $10,000. That's a lot of money. Well, just because most people don't have a
$10,000, why do you think 10 times that amount would be an issue? Actually, shame on me for
harping on over $10,000 in negative equity. The average is $7,200. That's out of the reach of most
people. Dad, if you told me tomorrow I had to come up with $7,200 or I was going to be SOL,
it'd be hard. It'd legitimately be hard. Yes, I think that is not normal for most people to be
like, oh crap, I need $7,200. Imagine your monthly payments making cash poor,
so you want to get rid of your car payment, but you owe $7,200 more than it's worth.
You're not even more cash poor. I think this is a tremendous, tremendous challenge for both the
auto industry and for people in general. Well, consumer debt is a challenge for people in general,
especially in this country. What seems to make it worse in auto sales is the larger the amount
of negative equity that somebody has, the more difficult it becomes to roll that into a next
car purchase. Or the reality is, takes those people out of the market, so you have fewer people
to sell cars to because, well, we've spent the last three, four, five years
burying these people. These people thought they were buying cars and what they were really doing
is they were going to a funeral home and they were buying their own coffin.
That's a good clip. Someone clip that. Someone clip that. That's a good clip.
We discussed this last week when Brian Benstock from Paragon Honda talked about it,
where the longer the term of the loan, the worse it is for your business long term.
It's good in the short term, but in the long term, you're costing yourself business.
So three, four, five years ago, when there was a shortage of cars, people were paying whatever
the dealer was asking. Of course. Well, now if those people want to get out of those vehicles,
they still owe more than what the value of that vehicle is. So it effectively takes them out of
the market. So what have we done over the last three, four, five years? We have in an attempt
to make things that are unaffordable appear to be affordable. We have lengthened the amount of
time it takes to pay back that loan. So we have gone from when I first started 24 months,
then 36 months, and we are up to 84, 96, and in some cases, 120 month loans
for people so that they perceive that they can actually afford what is unaffordable. Well,
when you do that, you are effectively taking those customers out of the market. They cannot come
back and get another car. Okay? If, for instance, that $10,000 car that we spoke of, and that the
customer still owes $17,214, well $10,000 of that loan is secured by the car. That, if I may,
$114 is secured by the air that we collectively breathe. That I need to pull this up. I'm sorry
to interject, but it's to your point and data that corroborates what you're describing.
Underwater buyers are more likely to take out an 84 month car loan in the fourth quarter of 2025.
41% of underwater new vehicle buyers financed with an 84 month loan
compared with 21% of total new vehicle buyers using financing. When you show up with negative
equity, that's bad to begin with, then you're rolling it over and you're taking out a longer
loan term. This is kicking the can down the road. And this data, dad, this one in particular,
the fact that 41% of those that show up with negative equity are taking on 84 month financing,
that was like the, that was, okay, we had an uppercut earlier, we had a left hook, we got a
little right hand, I mean, this is scary stuff. And again, I think it's the economy on alert,
because this is not only going to take people out of a car market, because when they go to trade in
their vehicle, which we also updated that shows that consumers are trading in newer used vehicles
and still having more negative equity than they have in the past, it's just going to end up screwing
people when they have a total loss, for example, when they get an accident, they have a total loss
and they don't have gap insurance. They're going to be $7,300, $7,200 upside down and have to figure
out what to do with that. This is bad news, I think for the auto industry and good news to be,
to be clear for customers that have gap insurance or good news for customers who have been on the
sidelines. Well, and what was interesting is that those people that have negative equity end up
going into 84 month notes. Okay, so here would be the interesting stat that I would want to know.
This is where my mind goes rather quickly. What was the length of the loan that they were in
prior to this? Okay, and how long did they remain in it before they decided it was time to get out
of it and get into a new car? And what I, my suspicion would be is that many of those people
were in 66 72 month loans and they decided at 42 or 48 months that it was time to get
into a new car. Sure. And their history is going to suggest that they try to get out of a car every
three and a half to four years, but they keep signing up for longer and longer loans
and they keep piling on more and more in order to try to accomplish that.
They are effectively taking themselves out of the market for six, seven years now.
Got data pops. Come on, man. We got data. Age of underwater trade ins grows, excuse me,
grows alongside steeper negative equity. New vehicle buyers with negative equity on their
trade ins are carrying much more negative equity into deals even though they're trading in models
slightly later than in the past. So you can see here, you've got the age of the vehicle over on
the right. And so the age of the vehicle that's being traded in is about three and a half years
old as compared to, I don't know, go back a little while ago. It used to be around four years old
or way in the past. It was even a little bit lower at three, three and a half years old. So you've
got three and a half year old vehicles being traded in debt to people staying in their loans for
three and a half years with more negative equity. It just corroborates what you're talking about,
where people can kick the can for at least maybe a cycle or two, but eventually that
number is going to be so big the bank will ultimately not be able to approve that loan
to value ratio. I remember having these very conversations with people 40 years ago,
okay, where people would come in and they were upside down on their car. They owed more on their
car than what it was worth and they decided that they wanted to trade it in and get a new car,
but they didn't have any money to put down because why should I put money down? Just tell me what my
monthly payment is. I need to keep my monthly payment affordable. So we started, and I used
to look at these people and I would, the conversation would go like this. It would really
help if you could put some money down. Well, I don't have any. I said, well, at a certain point,
you're going to have to come up with money. Well, why is that? Well, we can roll some negative
equity into your new loan today. And then when you come back in two and a half from three years,
and you want to roll even more negative equity into that next loan, we can probably do that.
But after that, you're going to have so much negative equity, we're not going to be able to
find a bank that's going to be willing to cover all that for you and roll that into your next loan.
So at a certain point in time, Mr. and Mrs. Customer, you can either pay me now or you can pay me
later, but you're going to pay me. It is incumbent upon you. It is going to, one day you're going
to wake up and you're going to realize, I've got to come up with money now. I might not have the
money, but I have to come up with money if I want to get a new car. You just can't keep kicking
that can down the road. And at a certain point, you have to stop kicking the can and you have to
act responsibly. That looks like money down. Let's quantify the impact of this. Let's go to
our auto loan calculator. So we'll just keep everything here. You're in Maryland sales tax,
et cetera, et cetera, buying a $50,000 vehicle. And let's do, dad, what most people are doing,
41% 84-month car loan. So what that looks like with all these variables set up, you're spending
$50,000 on the car, you're putting $10,000 down, 6% sales tax, the title registration,
other fees is $2,800. We're just going to leave it all there. Interest rate of 5%. Sure,
that seems low, but we'll leave it. $565 a month payment and you're paying back $7,489
in interest. So your total cost, when everything's all factored is $63,289. Now let's do the inverse,
dad. Your down payment's not $10,000, your down payment's zero. And now instead,
let's do a trade-in value of $10,000, but you owe $20,000 on your trade-in.
What do we think's going to happen here? I'm guessing the payment's going to go up a lot?
Payment's going up a lot, $848 a month. And now we've got $11,000 being paid back in interest,
$67,000 in total expense. So it just puts into perspective here that rolling negative equity
over is not the answer. And the latest Edmunds data continues to corroborate some of the weakness
that we're seeing in U.S. consumer financial health. It's really concerning, to say the least,
and the scope of it, the fact that it's becoming so large as what concerns me.
Well, listen, we are a country that has lived off of credit for what, the last 800 years. I mean,
after the Second World War, it was like, okay, let's lend people money. There's money to be made
if we lend people money, and let's encourage people to borrow more money than they should.
And let's not educate people into what this could mean for them. And because of all that,
we have now find ourselves in a situation where many, many people are financially illiterate
when it comes to these situations, and they continue to put themselves in bad positions
as opposed to a good position. The banks, the government is all complicit in this. They encourage
it, they allow it to happen, and they continue to allow consumers to make bad choices. Now,
we live in a capitalistic society, so I know the comments are going to go, well,
it's not up to us to protect these people, correct. But it is up to us to educate these people
so that they don't make these inappropriate decisions. So there is some complicity,
complicity on all of us, because we're not having these conversations often enough.
We are not sharing with the vast majority of Americans, what is bad about this?
And I told you the story, and I joked about it for years, but back in the 80s when Ronald Reagan
was president, and that was when the concept of deficit spending for the government really
kind of kicked off. And I remember having conversations with your mother, and she was
saying to me, Ray, we're spending much more money than we're bringing in. And my response was, well,
if it's good enough for the government, it's good enough for us. It was a joke, but if it's good
enough for the government, and the population sees that it's good enough for the government,
then the population starts to believe, well, if they can do it, why can't I? And that is part of
the problem. You and I have such different takes on things. I do not think the fact that our federal
government spends more than they make influences individuals to spend more than they make. I
think it's the marketing of these manufacturers that convince us that every few years we should
buy a new vehicle. But regardless of what the root cause is, the root cause is probably a myriad
different things for all sorts of different people. The net outcome is the same. Record setting
negative equity data from Edmonds that just puts into perspective how challenged the auto industry
is going to be for the foreseeable future. This is not something that's going to impact car sales
for one year or two years. This is going to impact car sales for many years. And sadly, it only looks
like it's getting worse. And the way that we can look at that is because 84 month loans, 41% of
people with negative equity choose that, 21% of people who have all auto new car auto loans choose
it. We just are rolling the negative equity down the hill and eventually it'll catch up to people.
But for the time being, what's the impact on people in our community dad who are thinking about
buying a car? Probably means access to credit is a little easier now than ever before. Doing your
homework on selling a vehicle, do not just take the first trade and offer from a dealership,
do your competitive intelligence, get quotes from Carvanna, get quotes from Car-Edge, get quotes
from Car-Max, get quotes before you sell a car. That's really important. I'm just thinking there's
a couple things here for our community that are takeaways. And there's many pundits who believe,
oh, this is a short term thing. No, I don't see how it would be a short term thing.
I believe there could be a short term solution to some of it. And that to me, if you're a person
that is part of the 29% of the population that's trading in a car that has negative equity and
you have that average amount of negative equity of $7214 and you don't necessarily have the cash
to offset it, in my opinion, the best thing that you can do is get your ass into a three-year lease.
Roll as much of that negative equity into that three-year lease as you can. And then at the end
of 36 months, guess what you don't have anymore? You don't have negative equity. You don't have
any equity, but you're back to zero. It's a way to start fresh. And that to me makes a hell of a
lot more sense than going into another 84-month loan or a 96-month loan or 108-month loan
or a 10-year loan. So if you find yourself in that position and you can look at your history
and you see that you try to get out of your car every three and a half to four years,
do yourself the favor, put yourself in a three-year lease, and get back to zero in 36 months so you
can start fresh. Don't keep compounding the situation by just rolling all that negative
into another longer-term loan. That's not going to do anything for you.
Pops, we have another important story that we need to cover this morning. Before we do,
I want to pull this comment up from Andrew. What do you do if a dealer on the phone tells you
the internet price is, quote, use, debate, and switch people? Everyone does it. Got to get people
in the door. What an honest salesman. I brought this up. I want to get my dad's answer. I also
brought it up in the context of the car edge dealer ratings. I'm going to pull this up on the screen.
This website, caredge.com, slash dealer dash ratings, or just Google search car edge dealer
ratings, you can literally find dealers on here. I'll search for dealers in the Washington, D.C.
area. One of the things you'll be able to find rather quickly is if dealers do add-ons and things
like that, or if their dock fee is above state averages. I bring this up because obviously,
so you can see here, theft protection, for example, you should avoid, not avoid, you should just be
mindful of dealerships that are adding add-ons. That is something that you should be really
thinking about before you head in because if they're adding add-ons, that's going to be a bit of a
waste of time. It's that bait and switch that we've talked about. What do you do if that honest
salesman tells you that when you call? You tell the salesperson, I appreciate your honesty. I really
do. I'm going to go find a dealer that doesn't operate like that. That's what you do. We have,
as consumers, we have a choice to make. Do we want to do business with people that lie to us
to get us in the door initially, or do we want to do business with people who tell us the truth?
We might not like the truth, but sometimes we need to just accept the truth.
I do appreciate the candor that salesperson being like, look, everyone does it, so we do it too.
Again, what we're trying to build here should level that playing field, so you don't have to
do that anymore, so customers, before they go to a dealership, know who are playing those types
of games. Let's go to our other story that we need to cover today, which would be about Honda.
Honda sales have been struggling here in the United States of America. We even covered a story
the other day. They're reverse importing vehicles back to Japan, which is crazy as well. That retail
King Honda bets on tactical fleet to shield residuals. What the heck does this mean? What's
sales as a tool for the auto industry to try and make sales numbers look better here,
as we know they've slid down? Well, I can tell you from when I was with Acura for 12 years,
and Acura is the luxury division of Honda. I remember when I first started and I said to
my factory rep, well, I'm going to try and sell 10 to 20 Acuras a month to like Enterprise and
some other rental companies. Her exact words to me were, you are not. You will not. We don't want
you to do that. You are not allowed to do that. Honda believes very strongly that if you sell to
like rental car companies, you are reducing the value of the brand. It brings the value of the
brand down. So we can look in this article, we'll be able to see that Honda's fleet sales
are so much lower than their competitors in the industry. I believe Honda's fleet sales last year
were 3.2% of what they sold in this country were to fleet buyers. And fleet buyers could be
rental car companies, could be corporate fleets, could be things of that nature.
If you take a look at Nissan, for example, who is struggling mightily. I mean, Nissan is,
I mean, they don't have retail customers that want to buy the stuff that they're building.
So 25% of what they sold last year, they sold the rental car companies and things like that.
Even Toyota sells three times as many percentage wise fleet vehicles than Honda does. So for Honda
to say, we need to increase our sales a little bit. And one of the ways we're going to do it is
we're going to tug on that fleet lever a little bit. They are never going to pull on that fleet
lever the way Nissan does. Because they just know it destroys the brand's reputation.
It destroys the resale value of their vehicles. And Honda needs to protect that because
they probably for mass market brand, an Asian mass market brand, they probably have a higher
penetration for leasing than the other brands. So they need to protect those residual values.
That's why they will never get that deep into fleet sales. But they are not a sign of the times,
dad. I mean, Honda sales not doing well. And so they're looking at, I like this fleet lever,
fleet lever, fleet lever that they're going to pull. It's a weird saying they're going to tug
on their fleet lever, dad. Come on, when else but now to tug on your fleet lever?
Well, you know, there's never been a better time to tug on your fleet lever or to toggle
your fleet lever. I mean, let's face it, but it's a tool. It's a tool in their toolbox. And it's
a tool that they very rarely utilize in their toolbox, which is why their resale values are
astronomically high and why their residual values are high. And the fact that, say,
Nissan has 25% of their sales to fleet, well, there's the reason why their resale value of
their vehicles is so damn low. So yeah, it's interesting because they very rarely tug on
that lever, but apparently it's time to do it a little bit. And my suspicion would be that
their hope is that their spring selling season is a little bit better than what we've seen
recently and then that they can take their hands off of that lever.
Dad, I know they desperately don't want to pull on the fleet lever. That being said,
sometimes you got to pull on it when the time calls. God do it. And sales are down to half a
percent year over year for the month of February. Dealers are struggling. That's a recipe for for
tugging. Yeah, no. And, you know, apparently, apparently, nobody loves tugging as much as you
do because you keep bringing it up. Gentlemen, I apologize, but I apparently raised a big tugger.
What a privilege that this is what we get to do professionally. This is our careers. Thank you
for everyone. This is your career. My career, maybe. You're stuck with me. All right, folks.
Excuse me. Dad, let's call it a show, especially before we get too much further down that path.
Today's show, again, was brought to you by caredge.com. We appreciate Edmonds for all the
data that they shared. This Honda story will keep our eyes on as well. For those of you, again,
that are unfamiliar, we've got an incredible team and for the past six years,
have been providing car buying services to the masses. We've helped hundreds of thousands of
people. We appreciate everyone that tunes in. We look forward to reading your comments and your
suggestions. Again, we have the beta program for the dealer ratings, so please use that,
share feedback. And as always, we are grateful and appreciative of you spending some of your
day with us. Dad, that was fun. I enjoyed today. Yeah, me too. I think, yeah, yeah.
Oh, Dad, we've actually helped you. I don't know that it was as fulfilling as I might have liked,
but there you have it. We had some kind contributions come in from Matthew. Sorry,
out of a vehicle every 18 to 24 months. Pay cash and hope it appreciates.
We'll try and get the Cayman GTS cross-country picks to Zach there this week. Thank you,
Matthew. Can't miss that. What Matthew does is a lot more doable than say if Matthew was getting
the Nissan Rogue every 18 to 24 months. Yeah, seriously. And then Matthew has a funny joke,
but you know what? This is a PG show, so I'm not going to read this one. I've gone too far. I'm
stopping. Matthew, you're a funny, funny man. Nope, we're just going to let it go. We're going
to like it. We're going to share this PG. Yeah, yeah, yeah. All right. All right. All right.
Apologies. All right, we're back tomorrow. Folks, we appreciate everyone tuning in. Thanks so much.
CarEdge.com if we can help you out. Love you, Dad.
Yeah, love you too. Have a great day. Everybody will see you back here tomorrow.
If you liked the show, please take a moment to rate, review, and subscribe. It really does help
the show to grow. Thank you for listening.
About this episode
Edmunds' latest data reveals a troubling surge in negative equity among U.S. car buyers, with 29% of trade-ins underwater and an average negative equity of over $7,200. The discussion highlights how longer loan terms, sometimes up to 84 months, mask affordability but ultimately trap consumers in debt, limiting their ability to buy new cars and posing risks to the broader economy. The hosts explain why this trend is alarming, especially for those without gap insurance, and how it reflects deeper issues in consumer debt and auto financing strategies.
Today on CarEdge Live, Ray and Zach discuss the latest data from Edmunds. Tune in to learn more! Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com
for information about our collection and use of personal data for
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