It was a smooth ride for a moment, Brad Lunday recalled.
A couple of months ago, the 28-year-old test drove a pair of cars at a Milwaukie, Ore., dealership. The Kia-made minivan felt better in his hands, but he joked he couldn’t pass over an American car, a sport-utility vehicle from Chevy. Compared with the heap he normally drove, both practically glided over the road.
But the wheels of the deal quickly fell off. The sales team, who showed the typical eagerness to work with Lunday’s budget, returned from a back room and said they couldn’t make a sale.
Lunday owed $5,000 on a car worth barely more than $700. The sale ended there.
“I thought maybe $1,500 I’d be upside down, but definitely not five grand,” he said.
Like many Americans today, Lunday has negative equity — also called being underwater or upside down on a loan. While trading in a car on which you owe money is nothing new, recent reports say the number of those transactions is rising to record levels and, with it, comes the threat of delinquencies and even repossessions.
The problem
Recent reports indicate that many car-buyers across the United States are waist-deep in auto loans. Consumer website Edmunds.com reported 32 percent of trade-ins through the first nine months of 2016 were underwater, the highest rate recorded.
The previous record high was 29.2 percent, set before the recession in 2006. The lowest year for negative equity trade-ins was 2009, with 13.9 percent.
For the month of November, buyers still underwater on their vehicles made up 31.3 percent of new-car sales, according to J.D. Power and Associates, the highest proportion in a decade. In its report, Edmunds.com said the average amount of negative equity was also a record: $4,832 per vehicle.
The recent torrent of underwater buyers can be traced to elongating terms of auto loans. The average car loan today is 68 months, according to the site Experian Automotive, up one month from 2015. Since 2002, auto loans have grown a full year.
Car loans also tend to be longer for people who are financially pinched. For people with lower credit scores — in the low 600s or below — an auto loan can stretch to six or seven years, according to the Edmunds report. While longer terms are designed to make cars more affordable with cheaper monthly rates, they also carry greater risk of default.
There is also an uptick in people with low credit scores falling behind on their auto loans. The Federal Reserve Bank of New York reported that delinquent payments after 90 days rose from 1.6 percent in the third quarter of 2014 to 2 percent in third quarter of 2016. Considering the millions of low-credit borrowers, the bank recently called the trend a “significant concern,” as reported by The New York Times.
“The increased level of distress associated with subprime loan delinquencies is of significant concern,” researchers wrote in a blog post Dec. 1.
Upside down
Lunday, a former Washougal resident now living in Troutdale, Ore., knew he would be a little underwater, but he didn’t expect a deluge.
He pays $265 per month for the rickety 2002 Ford Explorer, which he bought used to replace another clunker that sputtered out. It has racked up 202,000 miles. Ominously, when he bought it a few years ago, it broke down within the first few weeks.
“It’s a battle because I’m constantly having to put money into it to keep it running,” he said.
There have been times he’s fallen behind on payments, but sometimes he’s had to prioritize his bills. He’s the sole provider in a house of six people, earning just north of $16 per hour working for an industrial manufacturer.
“We can’t afford to have this car repoed. … We have other bills we can’t keep up on as well,” he said. “Obviously, I have to have a car to get to my job. If I don’t have that, I don’t have a job. If I don’t have a job, I have no place to live. And I have a big family to support so I have to somehow get it together.”
He tried another time to trade in the car, but he was turned away then, too. Because he refuses to get a co-signer to make a new deal, his only recourse is to patiently pay it back and hope it doesn’t break down.
In Clark County
Data localized for Clark County on underwater auto loans isn’t readily available.
While individuals talk of situations similar to Lunday, Jon Creedon, owner of the Vancouver Auto Group dealership, said he and others have not seen a rise in underwater car-buyers this year.
That’s not to say he and other dealers haven’t witnessed it. When the economy was just lurching from the recession in 2012 and 2013, people found work again and needed new vehicles. At the time, credit scores still were bruised and underwater loans were apparent.
“That’s, for the most part, gone,” Creedon said.
By his own observation, vehicle owners in Clark County seem to take less risks when it comes to vehicles and vehicle finance.
“They don’t see it as a necessary part of their life. They don’t feel like their identity is tied up in their car. Maybe they’re a little more down-to-earth, more fiscally conservative,” he said.
