One-Third of U.S. Consumers Are Underwater on Their Vehicle Trade-Ins

Well, here we go again with underwater American consumers - only this time it's autos, and not houses, that are upside down these days.

Here's the deal. A new study shows one-third of U.S. vehicle owners are underwater on their auto trade-ins, meaning they owe more than the vehicle is worth.

According to Edmunds.com, "about 32% of all trade-ins toward the purchase of a new car this year have negative equity." Also, "upside down" auto consumers "had an average of $4,832 of negative equity at the time of trade-in, also a record."

How did so many Americans get into this predicament? Hubris might be part of the reason.

"It's curious to see just how many of today's car shoppers are undeterred by how much they owe on their trade-ins," says Ivan Drury, Edmunds.com senior analyst. "With today's strong economic conditions at their back, though, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle."

Some industry experts blame high sticker prices and problematic financing deals for the underwater issue.

"The rising cost of new cars has many consumers extending their finance terms rather than increase their down payment to lower payments," notes Jim Dykstra, founder of Vinadvisor in San Francisco

That scenario not only increases the length of time a consumer is "underwater" but also their risk, Dykstra explains. "If a consumer who is underwater today by $4,000 has a total loss -- due to theft or accident -- they will be required to pay the $4,000 immediately," he says.

Dykstra says that more consumers who are short on cash and struggling to keep payments lower should consider leasing. "While cars are essential to our lives, they are terrible investments," he says. "Many consumers would be better served to lease a new car for 36 months. That means a lower payment, and less cash out of pocket protection in the event of a total loss. Plus, most new car leases include guaranteed asset protection coverage that pays the difference between current value and total due."

Leasing over owning usually leads to a stronger credit score, too. "A consumer who leases a car for 36 months at $300 per-month has a total obligation of $10,800 (36 x $300) on their credit bureau compared to $21,600 for a 72-month loan at $300 per-month," Dykstra adds. "A new car with $10,000 less in total obligations is a big win for a consumer's credit report, as long as the consumer doesn't significantly exceed mileage limits."

Sarah Lee Marks, president of Automotive Business Services, Inc., in Henderson, Nev., agrees that the main reason so many consumers are upside down on their vehicles is they overpaid in the first place - but that's not the only issue. "They likely traded in a car where they owed money, and the dealer put the negative balance -- or net difference -- on the new car loan," she says. "Plus, the buyer likely put zero dollars in as a down payment," she says.

Add in a high loan interest rates and the fact that the car or truck model was discontinued, had a high recall rate or theft issues, or was otherwise devalued in the marketplace, and it's actually no surprise so many Americans are underwater on their vehicles, Marks says.

"For consumers, some of those issues are controllable and some are not," she explains. "But no matter what the case, auto consumers should be aware when doing their shopping research how these factors can financially affect the car they choose."

If they don't, it's man -overboard, at least from a financial obligation sense. And it may take a long time to dry out.

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