Good news: Car prices are falling. Bad news: It's a terrible time to trade in your car. Here's why.

By Venessa Wong

This spring and summer 'will probably be the best time to buy a car in the last few years,' says one expert - but people who bought during the pandemic will lose more money on trade-ins

Prices on new cars are expected to drop in 2024 as the industry moves beyond the supply-chain issues that pushed up auto prices during the pandemic, which will gradually ease the prices on used vehicles as well.

That's welcome news for car shoppers who have faced record-high prices over the past couple of years. But car owners who bought when prices were peaking and now want to trade in their vehicles may have less to celebrate, experts told MarketWatch.

The average cost of a new car is $49,447 this month, and $31,556 for a used car - up 29% and 34%, respectively, over March 2020, according to CoPilot, an AI-assisted car-shopping app.

But CoPilot CEO Pat Ryan expects car dealers to offer more discounts on vehicles this spring and summer, in part because interest rates on new-car loans are high - averaging anywhere from 5.64% to 14.78%, depending on the circumstances. Dealer discounts on new cars are typically followed two to three months later by lower prices on used cars, he noted.

It "will probably be the best time to buy a car in the last few years," Ryan told MarketWatch.

Discounts on domestic vehicles are most likely, Ryan said, while discounts on popular imported brands like Toyota (JP:7203) (TM) and Honda (JP:7267) (HMC) - which remain in high demand relative to supply - will be least likely. He has recently seen incentives for Ford's (F) Explorer and Mustang models, as well as Hyundai's (KR:005380) (UK:HYUD) Santa Fe and Tucson models.

The average discount on a new car last month was $1,546, compared to $2,594 four years ago, according to data from the car-buying and review site Edmunds. Joseph Yoon, a consumer-insights analyst at Edmunds, said there are notable discounts for luxury large cars and large mainstream SUVs.

This trend will benefit prospective buyers whose vehicles are paid off, or who bought at relatively low prices before the spike during the pandemic.

However, anyone who is now looking to trade in their vehicle but bought high - primarily in 2021 and 2022, when many people paid above the sticker price - may find that they have negative equity, meaning they owe more on their vehicle than it is now worth. That means the dealer may tack on the difference in what they owe to the price of the vehicle they are buying.

Typically, trade-ins represent roughly half (anywhere from 40% to 60%) of transactions, said Yoon. A new Edmunds report found that one in five trade-ins have negative equity, and that the average amount owed on upside-down car loans climbed to a record high of $6,064 in the fourth quarter of 2023.

That reverses an unusual trend that happened during the pandemic, when the spike in used-car prices meant people were able to trade in their cars for more than they originally bought the vehicle. The amount that car owners owe on upside-down loans currently is the highest since Edmunds started tracking negative equity in 2015. At the end of 2019, the average amount owed was $5,784.

While the idea of "underwater" loans may bring up bad memories of the housing crisis of 2008 - when homeowners went underwater on their mortgages as home values crashed - cars are not like homes, Yoon noted. With autos, "negative equity happens to everyone," he said. "Literally any car you buy, more likely than not, if you sell the vehicle before you've paid it off, it's almost always going to be worth less than how much you have left on the loan."

Before the pandemic, a higher share of trade-ins were underwater - roughly 30% then, compared to about 20% now, according to Edmunds. Yet people who bought as car prices peaked and now need to trade in their car - for example, because their family got bigger - are losing more money now as vehicle costs come down, Yoon explained.

By late 2023, Teslas (TSLA), Land Rovers and Rams (STLA) had the most negative equity, according to Edmunds, due to a variety of factors including the original price, current incentives (especially price drops on Teslas) and the vehicle age.

"People with trade-ins, that's a hard place to be right now," said Ryan.

Meanwhile, those who choose to keep their car and continue making the payments on it won't feel the impact of negative equity, Yoon said.

The average loan duration on a car is now six years - and for some borrowers, that payment is substantial. The average payment on a new-car loan was $744 as of January, according to Cox Automotive. More than 17% of car owners pay more than $1,000 on their loan each month, according to February data from Edmunds.

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-Venessa Wong

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03-18-24 1343ET

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