More Drivers Are Drowning In Their Car Loans

New Edmunds analysis shows that more than 25 percent of new-car buyers in the United States are underwater on their car loans, meaning they owe more on their car loans than the vehicle itself is worth. Those who are underwater are in deeper than ever, with more than a quarter (27%) of those buyers having rolled $10,000 or more in prior debt into new loans. In Q4 last year, a staggering 29.3% of trade-ins toward new-vehicle purchases were underwater. On its own, that's a record that has stood since the first quarter of 2021, when 31.9% of trade-ins were underwater. The record amount of debt is enough to push the average amount of negative equity rollover past $7,000 for the first time.

American buyers are struggling with car payments

Trading in a car before it's been paid off is not a new idea. The habit itself has instead gotten expensive. Underwater trade-ins made today have an uncommon common thread to them: many were made during the pandemic and the semiconductor shortage, a once-in-a-lifetime event that drove automotive prices through the roof. With scarce inventory and no need to offer real incentives, those who did buy new cars at the time paid a premium, and the bill is coming due in a new way. Leasing options were also limited, leading to loans.

Of course, this is exactly how someone can get underwater quickly. Those sky-high prices are now gone, largely, and what remains is a huge gulf in prices between what new vehicles cost now and what prices were artificially inflated to during and after the pandemic. Now, higher interest rates are compounding with the amount of negative equity carried by some buyers. Call it an auto loan rip current.

The good news is, prices for used cars are falling. Though digging yourself out from debt like this can be a slow, brutal process, seeing used car values falling, though not to pre-pandemic levels, is at least a positive sign that some buyers are making it out.