Consumers Carry Unprecedented Debt on Underwater Car Loans
More and more car and truck owners are trading in their vehicles for new ones, even when those vehicles are worth significantly less than what they owe on their auto loans — and the amounts owed are at record highs.
Is it wise to get a new vehicle when you’re nearly $7,000 upside down on the old one? It’s even more challenging with electric vehicles.
Being in this unfavorable position means less money available for a down payment and increases the risk of taking on more debt to finance a new car.
Many Are In the Same Boat with Debt on Car Loans
Research from Edmunds reveals that one in four trade-ins for a new car or truck purchase in the last quarter of last year was “underwater,” meaning the owner owes more than the vehicle’s worth.
The data showed that 24.9% of trade-ins had negative equity at the end of last year, a rise from 20.4% in the last quarter of 2023.
It’s essential to note that this isn’t an isolated issue. Back in the fourth quarter of 2019, the rate of trade-ins with negative equity was even higher at 32.7%.
Record Highs for Owed Amounts on Underwater Car Loans
A startling revelation is that consumers are currently owing more on underwater car loans than ever before.
On average, individuals with negative equity owed about $6,838 on their loans, marking a new record. Alarmingly, around 25% of those with negative equity owe over $10,000 on their vehicles when trading them in.
Furthermore, 8.5% of vehicle owners facing negative equity owed at least $15,000 last year.
It’s important to clarify that many in this predicament are trading in relatively new cars based on typical standards.
On average, the cars being traded in when consumers are upside down are just 3.3 years old. Over the past five years, these negative-equity scenarios have typically involved vehicles nearly either slightly under or a bit over three years old.
What’s Causing These Borrowing Issues?
Many borrowers may not realize that interest on car loans is usually front-loaded, meaning that the initial monthly payments contain a high amount of interest, noted Ivan Drury, the director of insights at Edmunds.
During the early years of a car loan, monthly payments contribute less towards reducing the principal balance than you might expect.
“Unless it’s 0%, most of the interest is paid upfront,” Drury explained.
Thus, the early payments don’t significantly help in building equity in the vehicle.
For a period of years, particularly in 2021 and 2022, a shortage of used cars significantly inflated their values, preventing consumers from experiencing negative equity.
“Used car resale prices skyrocketed to such levels that it seemed impossible to lose value,” Drury remarked. “You could drive your vehicle for a year and still get back what you paid for it.”
Supply chain disruptions from the pandemic hindered new vehicle production, causing new car prices to soar. This subsequently pushed used car prices to unprecedented heights, benefiting consumers looking to trade-in.
However, that benefit has faded.
Several factors are contributing: First, many consumers had to borrow more when they paid high prices for new vehicles. Numerous buyers paid above the sticker price for cars and trucks in 2022.
Second, used car values are once again declining. New vehicles are remaining on dealership lots longer, which has increased incentives on new cars and led to lower prices for older models. Some experts like Drury anticipate that used car values won’t drastically drop in 2025, potentially sparing more buyers from negative equity situations.
According to the most recent consumer price index from the U.S. Bureau of Labor Statistics, used vehicle prices decreased by 3.3% over the 12 months leading up to December, while new vehicle prices went down by 0.4%.
Over the same period, the general consumer price index climbed by 2.9%.
Third, many consumers didn’t provide substantial down payments when purchasing new vehicles during 2021 or 2022. Drury noted that during this time, consumers often opted for longer loan terms, which typically slow principal repayment.
“You’re not giving yourself enough room to breathe,” Drury pointed out.
At times, some drivers must trade in their vehicles sooner than anticipated.
Perhaps they initially bought a used vehicle that wasn’t their preference, as it was the only available option during the pandemic.
“Many have regrets about their pandemic purchases,” Drury shared.
Alternatively, their circumstances may have changed; for instance, someone may have started with a compact car but later got married, had children, and now requires a larger vehicle such as an SUV or minivan.
If you trade in a vehicle after just two or three years, it increases the likelihood of encountering severe negative equity.
Electric Vehicles and the Risk of Being Underwater
So how can you determine if you’re upside down on your loan?
You can check your latest auto loan statement for the payoff amount and assess the current market value of your vehicle using resources like Edmunds.
The valuation will vary based on factors such as the make and model of the car, its popularity, and mileage.
For instance, if someone were upside down on a 2021 Toyota Camry, Edmunds data indicated an average negative equity of $7,236 in the fourth quarter of 2024.
Historically, the Toyota Camry retains good resale value, which may have led buyers to underestimate their down payments. Additionally, some buyers likely paid premium prices for this model in 2021, especially with the Toyota Camry recently transitioning to an entirely hybrid lineup for 2025.
A person with a negative equity situation linked to a 2022 Land Rover Range Rover might find themselves with an average of $10,900 in negative equity.
Similarly, an individual trading in a 2021 Volkswagen ID4 at the end of last year faced an average of $10,446 in negative equity.
Owners of electric vehicles face a heightened risk of being underwater compared to those with traditional gasoline-powered vehicles.
In the last quarter of 2024, the average owed amount on EVs with negative equity traded in for new vehicles was $10,186, an increase from $7,116 in the fourth quarter of 2022.
Generally, electric vehicles are relatively new and can lose value more rapidly, which affects their residual values unfavorably.
“If someone bought an EV recently,” Drury advised, “I hope they’re happy with it or they lease it.”
One challenge is that electric vehicle owners tend to trade in their cars sooner than those with traditional vehicles; for example, the average trade-in age for underwater EVs was 1.8 years, compared to 3.3 years for gasoline vehicles in the fourth quarter of 2024.
The opportunity to trade in a vehicle for nearly what was paid during the pandemic is mostly a thing of the past.
Gap insurance will not assist with negative equity when trading in an older vehicle for a new one. Gap insurance — short for guaranteed asset protection — covers the difference between what is owed on a loan and the value of the insured vehicle in cases of theft or total loss due to an accident.
Purchasing gap insurance offers some security against losses from theft or total loss situations, but it does not mitigate the risks of owing more than a vehicle’s value when trading it in.
How to Find Out Your Car’s Value
Consumers can track the historical value of their vehicle over time by visiting Edmunds at Edmunds.com/appraisal/history, where they can use a tool named “Trade in history” by entering some information.
For those who frequently desire to get a new car, leasing may be a better route, according to Drury, because buyers risk being underwater if they continue to finance new car purchases.
Taking on more debt for a new car while already facing negative equity from the previous vehicle only increases borrowing costs and monthly payments. In certain situations, consumers might roll the remaining balance of an old loan into a new car loan.
When individuals owe significantly more than the vehicle’s worth, financial institutions may require additional cash for the down payment.
On average, last quarter, consumers with trade-ins that had negative equity found themselves taking on $159 more in monthly payments and an extra $12,388 in total financed amount compared to the average for all financed new vehicles. Both figures are the highest ever recorded.
“The consequences of trading in a significantly underwater vehicle for a new one can be severe and lead to a cycle of poor financing choices,” Drury cautioned.
For someone deeply underwater, it might be wiser to hold onto the vehicle for a few more years, ensuring regular payments and maintenance.
Avoid the situation of being so far underwater on a car loan that it could lead to overwhelming debt.
For further inquiries, reach out to personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.