The Underwater Car Loan Situation Has Become Ridiculous

Automotive debt continues to swell, with the latest data being truly harrowing. Edmunds has reported that over 26 percent of all trade-ins on recent new-car purchases involved negative equity on the loan and the average amount owed on that upside-down transaction was a record-breaking $6,754.

We don’t need to tell you that owing more than a vehicle is worth is a bad financial situation. However, it seems like a scenario more drivers are falling into each month.

While Edmunds did note that Q1 of 2021 saw a higher 31.9 percent of new-car trade-ins being upside down, the number declined almost immediately. Unfortunately, it has been creeping back up ever since. The only real silver lining was that the number of customers upside down by over $10,000 came down slightly during the interim period. But the difference in the typical debt load has only increased since then.

Looking at the annual averages, we see a staggering 37.2 percent of trade-ins with negative equity in 2020. But the average amount was $5,845. By 2022, those figures dropped to 14.7 percent and $4,487. The assumption was that the period may have been an anomaly created as pandemic restrictions were lifted. Because negative equity has increased in all relevant metrics ever since.

Now, Edmunds estimates that about half of all new-vehicle purchases from this year came with a trade-in, which has a 26 percent chance of carrying negative equity. On average, the amount still owed on the vehicle is just shy of $7,000. But about a quarter of those who are still upside down on their auto loan actually owed over $10,000 in negative equity.

From Edmunds:

To highlight the financial impact of rolling negative equity into a new vehicle purchase, Edmunds analysts compared the costs for consumers who financed a new vehicle involving a trade-in with negative equity in Q2 against the industry average for all financed new vehicles. The average monthly payment for buyers who rolled negative equity into a new loan climbed to $915 in Q2 — the highest Edmunds has on record for this group and $159 more than the overall industry average of $756. They also financed $12,145 more than the typical new-vehicle buyer.

For car owners considering purchasing a new vehicle, Edmunds experts recommend they review their loan payoff amount and compare it to their vehicle's current trade-in value to understand if they're underwater — a crucial first step in making more informed purchasing and financial decisions.

"If you're thinking about replacing your vehicle but still have an outstanding loan, it's important to understand where you stand financially before making your next move," said Joseph Yoon, Edmunds' consumer insights analyst. "In many cases, holding onto your current car and staying current on payments and maintenance may be the wisest choice. But if a new vehicle is the right decision for you, doing your research is key. Choosing the right car for your needs and budget can save you more in the long run than any incentive the dealer or manufacturer may be offering. In today's market, smart shopping is your strongest defense."

Unless we’re all on board with converting society entirely over to one that’s driven by debt, this doesn’t look sustainable. Then again, debt bondage wouldn’t be the best foundation for a healthy economy anyway so you might as well hand everyone a rifle now. Usury is supposed to be a crime. But we’ve allowed it to become totally normalized because it benefits the right kind of people.

As of 2025, the average interest rate on a new vehicle (depending on your credit history and down payment) can range anywhere from 5 to 13 percent annually. By keeping prices and interest rates high (as wages remain low), we’ve effectively forced everyone but the wealthiest households into extended debt traps — funneling a staggering amount of wealth from the bottom up.

In the automotive realm, this has resulted in more people taking out massive high-interest loans on vehicles that were already expensive to begin with. While you can argue that it was their decision to buy a $90,000 SUV on a salary that wouldn’t support the payments, you cannot fault the millions of Americans who need a new vehicle but struggle to find something below today’s bloated average MSRPs. Affordable vehicles were intentionally culled from the market years ago, encouraging the $49,000 average transaction prices we’re now seeing on new models.

Taking into account decades of wage stagnation and higher interest rates, the problem is ballooning from an affordability issue to a legitimate economic crisis. The market seems long overdue for a correction and the fact that we haven’t seen one yet is starting to become kind of alarming.

“Consumers being underwater on their car loans isn't a new trend, but the stakes are higher than ever in today's financial landscape," stated Ivan Drury, Edmunds' director of insights. "Affordability pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan, even if those choices may have felt manageable in years past. And as buyers take on new loans with much higher interest rates than those from just a few years ago, even potential tax deductions can't meaningfully offset the thousands more they'll pay in interest. With a growing share of upside-down owners thousands of dollars in the red, many are at risk of getting stuck in a cycle of debt that only grows harder to break over time.”

We don’t have much to add to that beyond recommending you do whatever it takes to keep yourself out of debt. It’s the only realistic way to avoid getting stuck in a bad economic situation and encourage the relevant industries to shift tactics. It may even help keep a functional society glued together.

[Images: Michael Warwick/Shutterstock; Opat Suvi/Shutterstock]

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