More than one in four new-car buyers in the United States are now underwater on their auto loans, according to a recent analysis by Edmunds. Being “underwater” means these buyers owe more on their vehicles than the cars are currently worth.
The report highlights that those who are underwater are deeper in debt than ever before. Over a quarter (27%) of these buyers have rolled $10,000 or more in prior debt into new loans. In the fourth quarter of last year, 29.3% of trade-ins toward new-vehicle purchases were underwater, marking the highest level since the first quarter of 2021, when 31.9% of trade-ins were underwater. The average negative equity rollover has now surpassed $7,000 for the first time.
Pandemic-Era Purchases Fuel Current Struggles
While trading in a car before fully paying it off is not unusual, the financial impact has intensified in recent years. Many underwater trade-ins originated during the pandemic and the semiconductor shortage, a period when limited inventory and high demand drove vehicle prices to record highs. Buyers who purchased new cars at the time often paid premiums and were left with loans that exceeded the vehicles’ actual values.
Leasing options were limited during the same period, which forced many buyers into traditional loans. Combined with today’s higher interest rates, this has created what analysts describe as an “auto loan rip current,” making it increasingly difficult for some buyers to regain financial footing.
Signs of Relief Amid Falling Used Car Prices
There is some positive news for affected buyers. Used car prices are beginning to fall, though not yet returning to pre-pandemic levels. While recovering from negative equity can be slow and challenging, the decline in used car values could provide a pathway for some buyers to reduce their debt and regain equity in their vehicles.
As Americans navigate these financial pressures, experts warn that underwater auto loans remain a growing concern for new-car buyers, highlighting the importance of careful financing decisions and awareness of market fluctuations.
