CFPB Reports on Negative Equity in Auto Lending

In a new analysis on auto lending, the CFPB found that negative equity financing is rising, and these loans may result in "increased consumer distress."

In the report, the CFPB focused on the financing of negative equity, where the trade-in value offered for a consumer's vehicle is less than the outstanding loan balance and the unpaid balance is rolled into the new loan.

The CFPB noted that, despite a large loan market which totaled over US$1.6 trillion across over 100 million auto loans in 2023, specific information about these loans is either "limited or non-existent." The CFPB highlighted seven key findings:

1. From 2018 through 2022, over 10 percent of auto loans included the negative equity of a prior auto loan in a new auto loan. The CFPB found that "11.6 percent [of borrowers] included negative equity, 32.1 percent included a positive equity trade-in, and 56.3 percent had no trade-in."
2. Within two years of obtaining a new loan, borrowers were more likely to be subject to repossession if the borrower financed negative equity in the new loan. The CFPB said that borrowers including negative equity in a new loan "were more than twice as likely" to be subject to repossession, "within two years." Further, borrowers that included negative equity in a new loan were "almost 1.5 times [more] likely to have their [loan subject to repossession] within two years" when compared to borrowers who had no trade-in.
3. On average, borrowers that included negative equity in a new loan increased their monthly payments by 27 percent, which was higher than those "with a positive equity trade-in," whose monthly payments increased by 26 percent. The CFPB said that borrowers that included negative equity in their new loans had a monthly payment that averaged $626. Borrowers who had a positive equity trade-in or no trade-in averaged monthly payments of $496 and $493, respectively.
4. Among loans including negative equity, the borrowers had "lower credit scores, lower household income [and] longer terms on loans." The opposite was correlated with borrowers who either (i) did not trade in a vehicle or (ii) had positive equity from their trade in. The CFPB found, on average, that borrowers including negative equity in a new loan had a credit score of 704; borrowers with a positive trade-in and no trade-in had credit scores of 752 and 732, respectively. Also, borrowers including negative equity in a new loan had an average loan term of 73 months; borrowers with a positive equity trade-in and no trade-in had 68 and 67-month terms, on average, respectively.
5. Higher "loan-to-value and payment-to-income ratios" were common among borrowers including negative equity in their new loans. The CFPB reported that loan-to-value ratios for loans with negative and positive equity trade-ins were, on average, 119.3 percent and 88.9 percent, respectively. The ratio was 101.6 for loans with no trade-in. The payment-to-income ratios among negative equity and positive equity trade-ins was, on average, 9.8 percent and 7.7 percent, respectively. For loans with no trade-in, the ratio was 8.2 percent.
6. 16 percent of borrowers financing more expensive vehicles included negative equity in their loan. Among borrowers financing a less expensive vehicle, nearly 25 percent included negative equity in the new auto loan. The CFPB said that approximately 25 percent of loans for new vehicles costing between US$20,000 - US$29,999 included negative equity. For vehicles costing over US$50,000, 15.8 percent of borrowers included negative equity in the loan.
7. When comparing the amount of negative equity financed to the purchase price of a car, those who purchased less expensive vehicles included more negative equity in the loans than did borrowers who purchased more expensive vehicles. The CFPB found that on average, for vehicles costing US$20,000 or less, approximately 23 percent to 25 percent of the loan included negative equity. For vehicles above US$40,000, 10 percent to 14 percent included negative equity.

The CFPB said that given the rapidly decreasing price of used cars, "more consumers [are] at risk [of] owing substantially more on their loan than the vehicle is worth." Ultimately, this could increase delinquencies.