How the Outrageous Dealer Markups from 2021 Devastated the Current New Car Market

      It wasn't too long ago that car dealerships inflated prices on everything from popular enthusiast models to basic Crosstreks during the peak of COVID. Those acquainted with how auto loans function could see the signs, including the dealers—those who profited from individuals making poor and uninformed financial choices. However, that did little to deter them, and now, many are facing the repercussions of a declining car market alongside buyers who find themselves in negative equity on their seven-year loans.

      At the heart of this issue is the harsh reality of negative equity, which occurs when the amount owed on a vehicle exceeds its market value. Nearly anyone who has financed a car in recent years can relate to this experience, including myself. While negative equity has long existed, it has become a more significant challenge for those who purchased overpriced vehicles not out of desire, but out of necessity.

      It's easy to skip empathy and resort to sarcasm when witnessing someone stretch their budget to buy an unaffordable car. However, during 2020 to 2022, as dealers raised prices on all available vehicles, even individuals who opted for more economical cars found themselves in trouble. Typically pragmatic buyers seeking basic economy models were coerced into paying markups ranging from $1,000 to $5,000, as dealers insisted "that's where the market stands."

      Moreover, banks were quick to approve loan applications for amounts that significantly exceeded the cars' values. With interest rates nearly doubling compared to pre-pandemic levels, it was logical for lenders to greenlight these loans—even those that posed a high risk of default for the borrower. What once seemed normal turned upside down in the car market during the COVID years, leaving many Americans to face the consequences now.

      Our Editor-in-Chief, Kyle Cheromcha, provides a detailed explanation in the video featured at the beginning of this blog. Take a moment to watch if you're curious about the current situation and how we arrived here. We welcome your comments, whether on YouTube or on our site—we appreciate your feedback. And just as a heads-up, we acknowledge that we used the incorrect car in the graphic around the ~10:38 mark. Our apologies for that; we’re only human!

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