Average used car loans are now much more than the vehicles are worth

Used car prices have been all over the map in recent times, with some used models exceeding their new MSRPs as demand soared and supply dwindled. While that situation appears to have been mostly resolved, the financials of the used car market are still raising eyebrows, as buyers seem to be rolling more negative equity into their purchases in 2023.

A new study from J.D. Power and TransUnion pointed out that the average loan-to-value ratio of used car financing has ballooned to 125 percent during the first quarter of 2023. That’s up from 110 a year ago and 104 percent in the same period in 2021. The loan-to-value ratio (LTV) measures how much a buyer borrows relative to the purchased vehicle’s value, so a $12,500 loan on a car worth just $10,000 would net that average LTV of 125 percent.

The increase is partly due to the inflated prices used buyers have paid over the last few years. As values have fallen recently, those buyers find themselves “underwater” on their car loans, meaning they owe more than it’s worth. As those people return to the used car market, many are financing that negative equity or “rolling it into” their new loans, driving up the LTV.

Beyond the individual financial issues that this can cause, J.D. Power and TransUnion pointed out that elevated LTVs could be viewed as a warning sign for future delinquencies. Subprime borrowers, or those with credit scores in the high-500s and low-600s, are already considered at higher risk of default, and the study found that most of them saw LTVs of 140 percent or higher in early 2020. Those who could conquer their car payments and reduce their LTV were less likely to be delinquent, but people facing high LTVs were more likely to be 60 or more days past due.

Even if your financial situation and credit are solid, keeping a handle on how much you borrow, and ultimately pay, is a good idea:

Make the largest down payment you can afford.
Shop around for the best financing deal.
Try to pay off the loan early by making double monthly payments whenever you can. This can save hundreds, even thousands of dollars in interest.

Finally, remember that your car is a depreciating asset, and in the vast majority of cases, vehicles lose value over time, not the other way around.