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The Good News: Used Cars Inching Down; the Bad News: Borrowers Could End Up Underwater

Used car prices have fallen for three straight months. Although they are still a long way from pre-pandemic prices, this could be good news for car buyers, but also bad news for car loan borrowers.

Used car prices jumped during the early days of the Covid-19 crisis, forcing borrowers who bought then to pay more and take out bigger loans for their vehicles. If prices continue to drop, there's concern that these buyers could end up underwater on their loans.

According to the Manheim Used Vehicle Value Index, in the first half of October wholesale used vehicle prices - what dealers are paying at auction lots - have declined in recent months, falling 2% from September and down 10.3% from October 2021. The year-over-year price drop was seen across the board, from luxury cars (-13.5%) followed by SUVs (-12.3%), midsize cars (-10.4%), pickup trucks (-8.4%), vans (-6.3%) and compact cars (-5.4%).

Seeing these figures, investors are starting to worry about loan losses. There is concern that if consumers end up owing more than their cars are worth, they might stop making payments and let the vehicles get repossessed. According to Bloomberg, big banks are reporting that higher loss rates for loans originated late last year have contributed to an increase in write-offs for the period and that charge-offs for retail auto loans quadrupled in the third quarter. Some lenders are pulling back on originations and moving to tighten underwriting standards.

Although conventional car financing wisdom has been upended by the pandemic, there are still these tried-and-true tips for buying a car. If you need to buy a vehicle now or in the next few months:

Beef Up Your Savings

Save as much as you can for a down payment. The more you have, the less you'll have to finance.

Consider a trade-in

Trading in your current vehicle along with a saved down payment will help reduce a potential monthly loan payment on a newer vehicle.

Apply for loan preapproval

An auto loan preapproval can lock down your expected monthly payment on your purchase and gives you an advantage when it comes to negotiation.

Shop around

When looking for vehicle financing, consider comparingat least three different loan offers and compare the best with the dealer's offer.

Only buy what you can afford

Do the math to make sure you can make the monthly payments. Always prepare for a worst-case scenario.

When in the market for a used car, stop by Carousel Preowned. CarouselPreowned serving Iowa City, Cedar Rapids, Davenport, North Liberty, Marion, and Coralville, IA, is proud to be an automotive leader in our community. We do our best to ensure your complete satisfaction every time you step into our car dealership. This is why we offer the widest selection of used and pre-owned cars, trucks, and SUVs and provide true ease of purchase in Iowa.

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