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Used-car depreciation surges amid rising incentives, leasing, repos

August 25, 2017
The used-vehicle depreciation rate has doubled since 2014 as new vehicles continue to flood the market, a record number of off-lease vehicles cause oversupply, and repossessions tick up, according to the latest report from Black Book. 
The average used car lost 17 percent of its value in the past 12 months, bringing the average cost to $15,300, down from $18,400, the Aug. 22 report stated. 
The cause is three-fold: First, manufacturers continue to promote incentives to push the extra supply off car lots. Average discounts per vehicle rose 5 percent to about $3,600 in July, compared with the same period in 2016, according to Kelley Blue Book. Additionally, average interest rates on new-vehicle loans hit its lowest level in six months as zero-financing offers made a resurgence, according to Edmunds.com.
Second, rising incentives were coupled with the continued issue of lease penetration. In 2014, 3.6 million vehicles were leased and the majority of those three-year term contracts are coming back to market this year, according to Edmunds data. The problem will only grow in the next two years as a record 4 million and 4.3 million vehicles, respectively, come back to dealerships.
Finally, KAR Auctions is seeing a rising number of repossessions, Bloomberg reported. The company anticipates nearly 2 million vehicles will be repossessed by lenders this year, which is nearly double the 1.1 million seizures lenders handled at the height of the financial crisis.  
Of course, used-vehicle depreciation is bad for lenders concerned about residual values, but it’s also bad for indebted consumers who now owe more on their loan than the asset is worth. 
Americans are collectively working to pay off 108 million auto loans, which is roughly half of all licensed drivers, according to Federal Reserve data. As vehicle values decline, those consumers are at more risk of becoming upside down on their loan. 
Among those who have more debts than assets — roughly 14 percent of all Americans — the Federal Reserve said auto loans make up between 10 percent and 23 percent of their total financial obligations.
 
 

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