As prices and interest rates have continued to rise in recent years, more and more owners are finding themselves with a lot of negative equity in those vehicles when they’re ready for a new car, truck or SUV. A new study shows Americans are upside down at record levels.
New vehicle buyers with trade-ins that are underwater is on the rise as is the amount they owe on the vehicle.
In what should a cautionary tale for anyone buying a new vehicle, Edmunds.com analysts report that the number of American who owe more on their vehicles than what they’re worth is on the rise — and the amount is at record levels.
A quarter — 24.9% — of trade-ins toward new-car purchases had negative equity. During the fourth quarter of last year. That’s up from 24.2% in Q3 2024 and 20.4% in Q4 2023. In real terms, the average person trading in a car who is underwater on the loan is at an all-time high of $6,838 per vehicle. It’s a nearly $400 increase over the preceding quarter.
Getting worse
Those initial numbers are just the average. New vehicle prices rose more than 20% after the country emerged from the pandemic and interest rates have been higher as well. The if you are a “super prime” buyer — credit score between 781 and 850 — you can get an average interest rate of about 5% on a new vehicle.
A quarter of all trade-ins had negative equity, and the average amount owed is approaching $7,000 — a new record.
However, as the scores tumble, the rates rise causing buyers to either extend the term of their loans or simply deal with an interest rate that is now anywhere between 6.5% and 10% for buyers with credit scores between 601 and 780.
The result is that more owners are owing more on their vehicles at trade in. In fact, 24.6% of vehicle owners with negative equity who purchased a new-car replacement owed more than $10,000 on their car loans in Q4 2024, an increase from 22.2% in Q3 2024. Meanwhile, 8.5% of vehicle owners with negative equity owed in excess of $15,000 in Q4 2024, a 7.5% jump in Q3 2024.
What does it mean?
“Negative equity isn’t a brand-new phenomenon in the auto lending space — in fact, it wasn’t too long ago when more than a third of trade-ins toward new-car purchases were upside down,” said Jessica Caldwell, Edmunds’ head of insights.
“What’s particularly alarming in the Q4 figures is that a growing share of trade-ins are hitting the double-digit mark in thousands of dollars owed, making the cycle far more challenging for consumers to escape.”
Edmunds experts calculated the differences in cost between consumers who financed a new vehicle involving a trade-in with negative equity in Q4 and the industry average for all financed new vehicles. The result? The negative equity buyers added $159 in monthly payments and $12,388 more in total amount financed than the industry average for all financed new vehicles. Both of those figures represent all-time records.
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What should you do?
While many folks are excited to buy a new vehicle, some may lose some enthusiasm after seeing how much they owe on their trade-in.
If you’re in the market for a new vehicle, you may need to get out of the market, Edmunds suggested — at least until rates dip a bit lower or you can find a way to cut into the negative equity you have on your vehicle.
The average monthly payment for a new vehicle, according to Cox Automotive, is already more than $750 and this is despite the fact the term length for car loans continues to get longer as many buyers shop for a monthly payment rather than the price of the new vehicle.
“The ramifications for trading in a vehicle well below sea level for a brand-new vehicle can be drastic and lead to a cycle of poor auto financing decisions,” said Ivan Drury, Edmunds’ director of insights. “If you find yourself significantly underwater on your loan, your best opportunity to rise to the surface is to hold onto the vehicle while keeping up with payments and maintenance.”
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