Three in 10 consumers are under water on car loans at trade-in
More than 3 in 10 Americans (30.9%) are trading in a vehicle on which they owe more on their loan than the car is worth, according to a new report from Edmunds.
It found that the average underwater trade-in is $7,183 in negative equity, the highest ever for a Q1 and second-highest quarter on record. This amount is up 42% compared with the same period five years ago.
The average new-vehicle monthly payment for a buyer rolling negative equity into their new loan is $932, which is $159 more than the typical car buyer.
Jessica Caldwell, AVP of Insights at Edmunds, posted on LinkedIn that car debt is doing more than just rising.
“It’s compounding,” she said.
She writes that a reinforcing cycle is creating higher balances, longer terms, slower equity growth and more debt that is carried into the next purchase.
“No longer a niche dynamic, negative equity is becoming a more persistent feature of the trade-in experience and a growing affordability challenge across the market,” her post says.
An article written by Caldwell says that “the percentage has been consistently climbing since 2022, when inflated used vehicle values caused by the pandemic-fueled chip shortage insulated more shoppers from carrying debt into their next vehicle. Now, as vehicle values normalize, more buyers are trading in vehicles that have plummeted in value since the pandemic-era shortage, leading to a surge in the amount of negative equity being rolled forward.”
The article notes that vehicles typically depreciate most rapidly in the early years of ownership. As loan term lengths increase on average, the pace at which consumers make progress paying down their balance is slowing. If consumers trade in their vehicles too soon, they are increasingly left with more debt.
The data found that 90.2% of new loans involving trade-ins with negative equity carried terms of at least 72 months in Q1. Forty-three percent extended to 84 months.
The average term on these loans with rollover debt was 77.4 months, compared with 70.3 months for all new-vehicle loans. The average APR for consumers with negative equity was 7.9% in Q1, compared to 6.9% for the market at large.
“These longer and more expensive loan terms can help keep monthly payments within reach, but they also stretch out the time it takes for consumers to build equity in their vehicles,” the article says.
However, the data found that consumers underwater are holding on to their vehicles slightly longer, with the average age of trade-in with negative equity reaching 4.3 years, the highest on record. This means they are holding onto the vehicle longer, but still can’t get out of debt.
“Many of these vehicles were purchased during the pandemic-era period at elevated prices, and no amount of extra time or longer vehicle ownership cycles have been enough to close the gap,” the article says.
The data found that one in four negative equity cases (26%) in Q1, involved over $10,000 rolled into the new loan, with nearly 1 in 10 (9.3%) exceeding $15,000.
“At those levels, negative equity becomes more than a temporary imbalance — it directly increases both the amount financed and the overall cost of the next vehicle purchase,” the release says.
Buyers with negative equity in Q1 financed an average of $55,970. This is $12,071 more than the typical new-vehicle buyer.
“This creates a reinforcing cycle.” the article says. “Higher loan balances lead to higher monthly payments, which often require longer repayment periods. Those longer terms slow the pace at which consumers build equity, increasing the likelihood that some portion of the balance is carried into the next vehicle purchase.”
Edmunds adds that until vehicle values, loan terms and higher borrowing costs align, negative equity will continue to define the trade-in experience for a significant share of car buyers.
Image
Photo courtesy of Thai Noipho/iStock