It’s no secret that used car prices have been unprecedentedly high following the impact the COVID-19 pandemic had on the global economy. As inventory levels dwindled and demand skyrocketed, many consumers were forced to finance vehicles at values significantly higher than those before the pandemic. Now, with vehicle prices beginning to stabilize, those same consumers are finding themselves in an increasingly disadvantageous equity position.
According to a report from TransUnion, more consumers are finding themselves in a negative equity financial situation. In fact, calculations show that the average U.S. used car buyer is agreeing to loans worth 125 percent the value of the vehicle’s actual market price.
“To a large extent, used vehicle values were elevated as a result of the scarcity brought on by pandemic-related supply chain and inventory issues,” TransUnion Senior Vice President Satyan Merchant was quoted as saying. “As those issues have abated, and inventories have begun to return to more of a normal state, the value of those used vehicles has begun to decline.”
It’s worth noting that this new development comes as the average used vehicle transaction price during Q1 2023 dropped 6.4 percent from the same timeframe last year, thus falling to $28,381 as compared to $30,329 during Q1 2022. That being said, vehicle prices remain at historically high levels, as Q1 2023 figures are still up 44 percent as compared to Q1 2018 numbers.
In fact, prices are still so high that only 30.6 percent of used cars sold during Q1 2023 were priced under $20,000. This is a significant drop from the 60.5 percent figure recorded five years ago.
“As vehicle prices have risen and overall inflation remains elevated, consumers are increasingly starting in higher than average LTV positions to afford used vehicles,” Merchant added. “It’s more important than ever for consumers to effectively manage their payments to fit within their budgets while also allowing for a cushion for other ongoing expenses like insurance and repairs.”