Negative equity in the used vehicle market grew in the final months of 2023, underscoring normalizing trends in the preowned segment.
Edmunds noted high levels of trade-ins worth less than the outstanding balance of the owner’s car loan in its fourth quarter used vehicle report. Roughly 20% of new vehicle sales involving a trade-in had negative equity during the October-through-December period, the highest level seen since 2021. The most commonly affected trade-in buyers were those who purchased their model during the COVID-19 pandemic when car prices were drastically inflated due to inventory shortages.
Negative equity values also rose to all-time highs. Edmunds notes that the average outstanding balance on an upside-down auto loan was $6,064 during the period, a record-breaking number and an increase of roughly 46% since late 2021. Preowned values have also declined sharply. The average transaction price for a used vehicle dropped 4.4% year-over-year, with the greatest declines seen among models made in 2022 (-$6,763) and 2021 (-$3,294). The tendency for newer models to lose value faster reflects the impact automaker production had on the used vehicle market when it picked back up in early 2023.
Due to these factors, the preowned and trade-in markets are becoming increasingly hostile toward car buyers, even as the new vehicle market has become more friendly. These shifts should hardly come as a surprise to dealers who understand the relationship between the two segments, but for consumers who are looking to offset the cost of their next purchase, the current market can be extremely disappointing. Serving buyers with negative equity requires empathy. Striving to find such customers the best deal possible will help dealers increase retention in the months ahead.
