New car sales have plummeted about 50% since the coronavirus pandemic took hold in the U.S., and used car values have dropped as well. With great incentives on new cars, such as 0% financing for 72 months, and a slew of off-lease and retiring fleet vehicles, there is an overwhelming supply of used cars on dealer lots and at auction houses.
This could mean the car you planned on trading in to take advantage of some of these new car deals may not be worth as much as it was two months ago. Used car prices were down more than 11% in April, and J.D. Power expects them to be down 7% through June.
What that means is a record number of car owners who are upside down on their current car loans may owe money on their trade-in, instead of getting credit from it toward a new car. Edmunds reported 44% of new vehicle sales with a trade-in had negative equity in April, up from 33% in April 2019. The average amount people owe on their trade-ins is a record $5,571.
There are a lot of factors in play, such as record new car prices and longer loans that have let buyers borrow more money over time. The hard sales stop caused by the pandemic has only exposed what was mostly a bad business model to begin with. Trade-ins remain tricky, even with new financing deals that trim the cost of the average loan.
Dealers are wary of trade-ins due to the collapsing demand and low wholesale prices, Automotive News reported last month.
As auction houses re-open and dealerships get back to business, lower prices on used cars may help ease the glut. But no one knows when that might happen.
There are some options to consider with your trade in:
Instead of trading in your car now, consider holding onto that trade-in until prices stabilize;
Use the low financing available now to get out of the higher financing on the current vehicle you want to trade in;
Or if you think values will keep dropping, trade it in, take the hit now, and prepare to hold onto the new car for a longer period of time.
If you’re not upside down on your car loan and the financing rate is in the 6% range (Edmunds says it was 4.7% in April, down from 7.3% the year before), we’d recommend holding onto that car.
Robert Duffer is the Senior Editor of The Car Connection. He has reported on automotive consumer news for nearly a decade and can be reached at [email protected]