Negative Equity on Car Trade-Ins Hits an All-Time High

SANTA MONICA, CA — A rising number of car shoppers have negative equity on their trade-ins when they're purchasing their next vehicle, according to car information and shopping network

For the first three quarters of 2016, an estimated 32 percent of all trade-ins toward the purchase of a new car were underwater, according to Edmunds data. That's the highest rate on record, and it's up from a rate of 30 percent from January to September 2015. These "upside-down" shoppers had an average of $4,832 of negative equity at the time of trade-in. That also is a record.

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

There's a smarter play for shoppers who hop out of cars before they can gain equity in them, Drury said.

"Shoppers with this mind-set may want to consider jumping on the leasing bandwagon," he said. "They can get into a new car with great technology every few years without having to worry about how much they still owe on their trade-in."

To give an idea of how much these short-term shoppers can potentially save by switching to leasing, Edmunds found that the difference between the average monthly payment on a new-car purchase — $505 — was $77 more than the $428 average monthly lease payment in the third quarter. In general, new-car leasing is at its highest level ever. Leasing made up an estimated 33 percent of new-car transactions in 2016, through October.

The phenomenon of upside-down trade-ins is not limited to new-car purchases. According to Edmunds' Q3 Used Vehicle Market Report, a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a third-quarter record in the used-car market.

Edmunds generally recommends that all car shoppers wait until they have equity in a vehicle before they trade it in for another car. But in cases in which shoppers feel that their only choice is to trade in a car when they're underwater, Edmunds lays out a few strategies to minimize — or even avoid — the financial blow in its consumer advice piece "Upside Down and Under Water on a Car Loan."