Consumers Are Getting Crushed By Their Car Loans

Americans are finding themselves in a deeper financial hole than ever before when it comes to auto loans.

According to recent data from Edmunds, a rising number of car owners owe more on their car than the vehicle’s worth, termed “negative equity.” Even more troubling, the average balance owners have left to pay on their loans hit an all-time high in the third quarter of this year. Experts say it's an alarming trend for overall consumer health.

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Many car owners are in a bad spot

The numbers don’t paint an optimistic picture for vehicle owners hoping, or needing, to upgrade their car.

According to Edmunds, in the third quarter (Q3) of 2024, the average amount of negative equity on a car loan reached $6,458, with nearly a quarter of owners — 22% — owing more than $10,000 beyond what their vehicle is worth. A smaller but still significant 7.5% of owners owed over $15,000 more than their car was worth.

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The share of consumers with negative equity on their car loans has climbed significantly in 2024 compared to previous years, but it’s still lower than before the pandemic.

Jessica Caldwell, head of insights at Edmunds, said rising negative equity is a financial red flag. “Consumers owing a grand or two more than their cars are worth isn't the end of the world,” Caldwell said, “but seeing such a notable share of individuals affected at the $10,000 or even $15,000 level is nothing short of alarming.”

What’s driving the trend?

The rise in negative equity isn’t just a matter of consumer missteps. Caldwell points to a mix of factors, including the unusual market dynamics of the past few years.

Many buyers during the car shortage of 2021-2022 paid over MSRP for new vehicles. As the market normalized, these buyers found themselves with cars worth significantly less than they owed, with few opportunities to significantly reduce their loan balances.

Another issue: trade-in values for nearly new vehicles have declined as automakers reintroduce incentives and discount programs. Car owners expecting high resale values are now getting less for their trade-ins, making it harder to clear their loan balances when upgrading to a new vehicle.

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Long loans, short-sighted decisions

Another contributing factor to the rise in negative equity is the growing trend of long-term auto loans. While taking on a longer loan term can reduce monthly payments, it also increases the odds that a car will depreciate faster than the loan is paid off. This makes it much easier for owners to end up upside down if they decide to trade in before their loans are paid down significantly.

Many car buyers are too focused on the monthly payment and not enough on the overall cost of the loan or their long-term plans for the vehicle, according to 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,” he said. “With prices and interest rates being as high as they are, it's critical for consumers to think beyond the monthly payment and be honest with themselves about their ownership habits.”

Consumers focusing on monthly payments instead of the overall cost of the loan aren’t helped by automakers and dealerships, many of whom will push prospective buyers into loans with low monthly payments, often at the expense of the buyer’s long-term financial health.

How to avoid negative equity

For consumers looking to avoid this financial pitfall, Edmunds experts offer some advice. The simplest? Hold onto your car longer. Extending the time you own a vehicle reduces the chances of trading it in while still upside down, especially if you keep up with regular maintenance to preserve its value.

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For those who must buy a new vehicle soon, there are a few strategies that can help minimize the risk. One is to focus on cars with better resale values. You can check out what brands have maintained their value better on the used car market with CarGuru’s pricing trends tool. Cars that offer other financial benefits, such as lower fuel costs or reduced insurance rates, can also help make ownership more affordable in the long run, freeing up money to pay down the loan more quickly.

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"Shop around for incentives and lower APR financing, though be mindful those are less common offerings in today's market,” Drury said. “But most importantly: Find a car you really want and like, because if you don't you'll probably end up making the same mistake of trading in your newish vehicle too soon.”

Final thoughts

With interest rates high and prices for new cars remaining elevated, negative equity is unlikely to disappear anytime soon. For now, the best defense for car buyers is to be smart, think long-term, and avoid getting caught in the cycle of trading-in too soon.

Negative equity might be on the rise, but with the right strategy, buyers can avoid its worst effects.