1 In 4 Americans Are Now Trapped In Upside-Down Car Loans. Here's How Much They Owe As Debt Reaches Record Highs

According to Edmunds, more Americans are stuck with cars worth less than what they owe. This troubling trend has become increasingly common and their data shows how widespread it has become. 

When you look at the numbers, in the third quarter of 2024, about one in four people trading in their vehicles were in negative equity or "upside-down" on their car loans. The average negative equity hit an all-time high of $6,458 – and some owe even more. Edmunds reports that these figures are a growing issue affecting many car owners nationwide.

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So, how did we get here and what does it mean for those with upside-down loans? Let’s explain in simple terms.

Why Are So Many People Upside-Down on Car Loans?

The trend comes down to a few key reasons, mostly related to when and how people have bought cars in the last few years. During 2021 and 2022, car prices skyrocketed due to an inventory shortage following the pandemic. Because of this, many buyers paid more than the manufacturer's suggested retail price (MSRP) just to get their hands on a car. This meant buyers took on bigger loans without even reducing their loan principal in the usual way.

Things got more complicated when, as the market settled, car manufacturers began offering incentives again, lowering the value of trade-ins for newer vehicles. Unfortunately, many buyers who overpaid ended up with loans bigger than their cars’ depreciated value.

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On top of that, lots of people opted for longer loan terms, sometimes as long as seven years, just to make monthly payments easier. While this might sound like a good idea in the short term, it can be a financial trap – especially if you trade in cars frequently. Longer loans mean you will owe more than the car is worth for a significant part of the loan term, making it harder to get out of negative equity.

“With prices and interest rates being as high as they are, consumers must think beyond the monthly payment and be honest with themselves about their ownership habits,” said Ivan Drury, Edmunds’ director of insights. “A seven-year auto loan is a one-way ticket to negative equity if you know you’re not the type of person to keep a vehicle for that long.”

The Numbers Don't Look Great

Twenty-four percent of Americans who traded in their vehicles had underwater loans in the third quarter of 2024. Just a year ago, that was 18.5%. While the average debt was $6,458, 22% of those individuals owed $10,000 or more. Even worse, 7.5% owed at least $15,000 more than the value of their trade-in.

Negative equity isn't just a problem for luxury car buyers – it's happening across the board. Mid-size SUVs, compact SUVs and large trucks made up a large chunk of the vehicles traded in with negative equity.

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