A recent analysis by Edmunds reveals that more than one in four new-car buyers in the United States currently owe more on their vehicles than they are worth. This situation, known as being “underwater” on a car loan, is worsening, with 27% of affected buyers rolling $10,000 or more in prior debt into their new loans.
In the fourth quarter of last year, 29.3% of trade-ins toward new-vehicle purchases were underwater—a record high since the first quarter of 2021, when 31.9% of trade-ins faced the same issue. The surge in negative equity has pushed the average amount of rolled-over debt past $7,000 for the first time.
Trading in a car before fully paying it off is not a new practice, but the financial stakes have risen sharply. Many underwater trade-ins trace back to purchases made during the pandemic and the global semiconductor shortage, events that drove vehicle prices to unprecedented highs.
Limited inventory and minimal incentives forced buyers to pay premium prices for new cars, often opting for loans rather than leasing options.
Today, these pandemic-era purchases are creating a financial strain for buyers. New vehicle prices have largely normalized, but the gap between pre-pandemic valuations and today’s market, combined with higher interest rates, has left many borrowers stuck in a challenging cycle of negative equity. Experts liken this situation to an “auto loan rip current,” pulling buyers deeper into debt.
On a positive note, the value of used cars is declining, offering some relief. While the road to financial recovery can be slow, the drop in used-car prices may help underwater buyers gradually regain equity and regain control over their finances.
