More Americans are entering into auto loans that exceed the worth of their cars after vehicle values declined in the wake of dramatic increases during the pandemic, a report has found.
Used car loan-to-value ratios increased to 125 in the first three months of this year from 104 for the same period in 2021, according to the study released Tuesday by credit reporting firm TransUnion and market researcher J.D. Power. A ratio of 125 means that the borrower’s loan is worth 125 percent of the vehicle’s value.
The loan-to-value ratios, or LTVs, could be foreshadowing higher delinquencies ahead, the study found. Negative equity, or the amount that debt exceeds a vehicle’s value, has ballooned in recent years, with some consumers stepping into car dealerships $10,000 underwater.
“As vehicle prices have risen and overall inflation remains elevated, consumers are increasingly starting in higher than average LTV positions to afford used vehicles,” Satyan Merchant, a senior vice president at TransUnion, and its auto business lead, said in a statement.
Vehicle values are expected to decline further, according to a report. That’s a red flag for lenders.
“Given the possibility that accelerated depreciation will result in negative existing LTVs for longer periods, this will be especially important for lenders to monitor,” Merchant said.