Price gouging during the COVID era is now having repercussions for car dealers—just as anticipated.

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      During the height of the COVID supply shortage, dealers profited significantly as customers in need of vehicles had only two options: pay a premium or forgo transportation. Now, many of these customers are considering trading in their COVID-era purchases for something new, yet finance departments are encountering challenges in securing credit for them, as nearly a third of these buyers find themselves deeply underwater on their existing loans.

      Edmunds raised concerns earlier this year when the number of underwater customers being denied new loans began increasing. In March, a report indicated that over 25% of buyers had negative equity from a previous loan. By the second quarter, this figure rose to 30%, according to Automotive News, and has remained stable since.

      This issue is perpetuating itself. Incorporating negative equity into a new purchase results in customers essentially paying off two vehicles simultaneously while benefiting from only the most recent one they acquired. This deficit is likely to carry over into future purchases. A driver with negative equity faces an average monthly payment of $944—$167 more than the average buyer without negative equity. Currently, the average new-car payment in the U.S. stands at $777.

      That $944 number presumes the buyer can secure financing at all, which AN reports is becoming a more frequent concern. Dealers have noted that their finance departments are investing more time per transaction simply because it's more challenging to finance loans when the buyer carries negative equity, and finding a willing lender slows down the entire process, affecting other customers in the showroom as well.

      Perhaps more alarming than the statistics (and their ramifications) is that this latest wave of negative-equity buyers doesn't fit the typical mold. Traditionally, this situation is most common among buyers who take on excessive debt to acquire a rapidly depreciating luxury vehicle.

      However, this time it's affecting individuals who made more prudent choices, including buyers of the Toyota Tundra, Ford F-150, Jeep Wrangler, and Honda CR-V—all known for retaining their value better than the average model. As an analyst noted, the issue wasn't the choice of vehicle but rather the financing terms, which should bear most of the responsibility. Rising sticker prices, dealer markups, and higher credit costs all contributed to inflated loan amounts, leading buyers into difficult situations.

      A lot of potential trouble, indeed. Edmunds now reports that the average buyer with negative equity on their trade-in was carrying almost $7,000 in negative equity at the time of purchase. Throughout the loan, they accumulated nearly $6,500 more in interest compared to the average buyer. That's 60% more than what the typical buyer pays, all to experience the same cycle in three years. Yikes.

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