More and more consumers are finding themselves in financially exposed positions with their car loans. When you owe more on your car than its current market value, it’s called being “underwater” on the loan. According to Chantellé Henning, Head of Finance and Insurance at getWorth, this is a distressingly common scenario among car owners.
Henning shares, “We often get enquiries from customers needing to sell their cars but struggling with negative equity. Even though getWorth offers excellent prices, it doesn’t always clear the loan. Without the necessary funds to cover this difference, their options become severely limited.”
Henning recounts a recent experience: “A client needed to sell his premium 2022 model car. Its current market value is R500,000. However, he was shocked to learn that he still owed R700,000 on it, despite making payments for two years.”
In the United States, roughly one in five vehicles offered for trade-in are underwater. While specific statistics for South Africa are not readily available, getWorth’s extensive used car data suggests that the situation here is similar.
“We’re still dealing with the post-COVID hangover,” explains Henning. “There was a shortage of new cars, which pushed up used car prices as well as the cost of new cars since there were fewer promotions and discounts. Low interest rates and affordable repayments enticed many buyers to add extras to their vehicles, which increased their initial loan amounts. The auto market was in a mini-bubble, and consumers buying at that time began their car loans with a high base.”
“Currently, used car prices are dropping again, which means selling a car might not bring in enough to cover your loan, leaving more people underwater.”
Henning says that getWorth’s car valuation data and AI algorithms show that it’s not all doom and gloom. Used car prices didn’t crash, but rather returned to their normal behaviour of falling as a car ages and adds mileage. Also, while the used car market was in the doldrums in mid-2023, it has been picking up again recently.
However, being underwater on a loan is still a problem, and Henning has some tips for avoiding it:
- Choose a shorter loan term without a big final balloon payment. Monthly payments will be higher, but you’ll pay down the loan faster and save on interest.
- Avoid adding unnecessary extras to your loan, like certain types of insurance.
- Examine carefully what is being offered as part of the package and cross out anything you don’t actually need.
- Consider buying a used car instead of a new one. New cars lose a lot of value in the first year or two, while used cars generally hold their value better.
- Don’t roll the shortfall of your current car loan into a new car deal. It might be tempting, but you’ll have to pay it off eventually. Consider waiting to trade in your car until you’ve paid down more of your loan.
- Keep your car longer. Most car loans start out underwater because you buy at retail price but would need to sell at a lower trade price. It can take some time to break even, so switching cars too soon can leave you underwater.
- Choose cars that keep their value well, and be mindful of adding too much mileage to luxury cars, as this can make them lose value faster than you can pay off the loan.
By following these tips, you can better manage your car loan and avoid financial stress.
