US Car Owners Drowning In Debt: Underwater Crisis Deepens, Delinquency Rates Rise

With climbing interest rates and plummeting vehicle values, the U.S. car loan market is facing a significant challenge. Borrowers are increasingly finding themselves in a precarious financial position as the outstanding value of their debt continues to widen the gap with the market value of their car.

This phenomenon, known as “negative equity” or being “underwater,” is at its highest level since April 2020, according to reports from Edmunds.com Inc. In November, average negative equity reached a record $6,054, the highest since April 2020, as reported by Bloomberg citing Edmunds.com.

Struggling To Stay Afloat

Auto loan debt is now the third-largest category of consumer debt, trailing only behind mortgages and nearly equaling student loans. The Federal Reserve Bank of New York reveals that Americans collectively owe a massive $1.595 trillion in auto loan debt, constituting 9.2% of the nation’s consumer debt.

Fitch Ratings recently unveiled a concerning statistic: the delinquency rate on +60-day past-due subprime auto loans reached a record high reading in September 2023, hitting 6.11%. This alarming trend persists, with the rate remaining elevated at 6.00% as of October 2023.

The rating agency attributes this surge in delinquencies to persistent inflation and higher interest rates, which have left subprime borrowers struggling to stay afloat.

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Adding to the woes of car owners, the Manheim Used Vehicle Value Index (MUVVI) fell to 205.0 in November 2023, marking a 5.8% drop from the same time last year. The barometer tracking wholesale used-vehicle prices experienced a month-on-month decline of 2.1%.

However, the real eye-opener is that since early 2022, used-car values have plummeted by more than 20%, as many Americans hold an asset that’s rapidly sinking in value.

Access to a car is essential for countless Americans, especially those residing in areas with limited public transportation options. However, the astronomical prices of both new and used vehicles have rendered car ownership unattainable for many low-income workers.

To make matters worse, interest rates for those with “deep-subprime” credit scores can soar as high as 21.18% for used cars, according to data from Experian Credit Solutions, republished by NerdWallet.

Credit Score	Average APR, New Car	Average APR, Used Car
Superprime: 781-850	5.61%	7.43%
Prime: 661-780	6.88%	9.33%
Nonprime: 601-660	9.29%	13.53%
Subprime: 501-600	11.86%	18.39%
Deep subprime: 300-500	14.17%	21.18%

All Eyes On CarMax’s Upcoming Earnings

As a significant player in the used car retail sector, CarMax’s performance serves as a valuable barometer for the state of the U.S. auto market, particularly amid the ongoing negative equity crisis.

Investors are eagerly anticipating CarMax Inc.‘s KMX upcoming earnings report, scheduled for release on Thursday, Dec. 21, 2023, before the opening of the market.

The Street’s consensus estimate is for earnings per share (EPS) at $0.43, marking a 3% decline from last year’s same quarter. Estimates for quarterly revenue are expected at $6.3 billion, down 4% from a year ago.

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