Negative Equity

I’ll begin by defining negative equity.  I like this definition: occurs when you owe more on an asset than its current market value.

 

Automotive News came out with an article a couple of weeks ago “How Long Will Record Level Negative Equity Plague Dealers and Underwater Consumers?”  It says new vehicle buyers are trading in cars with a record $7,214 of negative equity in the fourth quarter 2025.  This equates to about $151 per month a consumer will ADD to their payment on a new car.  That $40,000 new car purchase is already $835 per month, now add the negative equity for a final payment of $986 per month.

 

Auto news outlets acknowledge the cost of new cars are the highest they’ve ever been, loans are going longer than ever before, and now negative equity is the highest in consumer history.  Consumers are paying on multiple cars on their one loan.  This cycle is very hard to break.

 

In my opinion, leasing breaks this cycle, but with a little initial pain.  A consumer will have to bite the bullet by either putting a good amount of money down to absorb the negative equity, OR getting a conservative vehicle, one you don’t like, to break the cycle.  Perhaps another way, if you can afford,  is to have a high lease payment with rolling all that negative equity into a lease AND still putting money down.  After that first lease, its clear skies with sunshine ahead.

 

After a 36, 39, 42 or 48 month lease is over, all that negative equity is gone and you start fresh on the next lease.  The second lease is where you can really choose your next car at the payment you desire.  If leases continue on the trend of getting better, that second lease would be a great value.

 

Most manufacturers require a 720 credit score to get a competitive lease rate: Honda, Toyota, Subaru, Kia, Hyundai, Jeep, and RAM are some examples.  To lease through the credit unions does require a higher score because they are more conservative with loans.  The point is leasing is THE sensible way to purchase a vehicle.  I’ve already discussed the multiple benefits of leasing, go back and see my blog.

 

If a consumer were to finance a car,  I would recommend putting a significant amount down to keep your Loan to Value at 75% and keep the loan at 60 months.  Also, I suggest getting an extended warranty that would cover the length of the loan to keep ownership costs down.  I really think consumers underestimate the cost of maintenance.  Oil changes are a couple of hundred dollars now, and parts have increased due to tariffs.  I would never own a car without some sort of warranty.

 

America has really reached a 21st century problem in the car market.  Consumers have to reevaluate their requirements on their car (features, options, colors), and have to catch up to how cars should be purchased.  Any old ideas of car buying need to be reconsidered to this new age of outrageous costs.  The world was shocked by a Pandemic.  Despite efforts to bounce back, it continues to get thrown off the tracks with tariffs, trade deals and wars.  With so much happening so fast, we can at least get a foothold on how the car market is changing.