Auto loans are dragging Americans underwater

More people buying new cars with trade-ins have negative equity than in previous years, according to the Wall Street Journal reports, and these borrowers already have more auto debt before taking on new, larger loans.

why is it important, according to the WSJ: “Consumers, sellers and lenders are treating cars much like houses during the last financial crisis: taking on so much debt that it often exceeds the value of the car.”

What is happening: Consumers and their advocates tell the WSJ that new-vehicle trade-ins are necessary for changing needs, car malfunctions, or life circumstances, like growing families.

  • Negative equity, higher interest rates and monthly payments, and longer loan terms trap consumers in “a cycle in which each new trade leaves them deeper under water,” according to the WSJ — and easy lending standards fuel the cycle.
  • Rising car prices have exacerbated an affordability gap that is increasingly being filled by auto debt,” reports the WSJ.

The big picture: In February, the number of Americans with auto loans 90 days past due hit a new high – 7 million – yet auto lenders have been making more and more loans in recent years.

Go further: Car loans mean banks don’t need high interest rates to make money

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