With used car prices down, selling your car may not be enough to cover the loan

A drop in used car prices means selling your car might not bring in enough to cover your loan.

This is the warning from Chantellé Henning, head of finance and insurance at online used car sales platform getWorth, who says South Africa is still dealing with a post-Covid-19 hangover when there was a shortage of new cars, which pushed up used car prices as well as new car prices as 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 car market was in a mini bubble and consumers buying at that time began their car loans with a high base,” she said.

But with used car prices decreasing again, selling a car still under finance might not bring in enough to cover the loan. Owing more on your car than its market value is called being “underwater” on the loan, said Henning.

“We often get enquiries from customers needing to sell their cars but struggling with negative equity. Without the necessary funds to cover this difference their options become limited.”

Henning recalled a client recently needing to sell his premium 2022 model car.

“Its market value is R500,000. However, he was shocked to learn he still owed R700,000 on it, despite making payments for two years,” she said.

Based on getWorth’s used car data, Henning estimates that about one in five vehicles offered for trade-in are underwater, though detailed statistics for South Africa are not available.

Used car prices haven’t crashed but rather returned to their normal behaviour of falling as a car ages and adds mileage, said getWorth.

This was confirmed by AutoTrader, which reported the average price of the most sold used vehicles has fallen by 3.5% in the first three months of 2024 compared with the same period last year.

“For consumers this is promising as it points to used car values stabilising after the turbulent effects of Covid-19,” said AutoTrader CEO George Mienie. 

However, being underwater on a loan is still a problem, and Henning has 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, such as certain types of insurance.
• Examine carefully what is being offered as part of the package and cross out anything you don’t 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 hold their value better.
• Don't roll the shortfall of your 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 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.