Trump’s tariffs are raising the prices of new vehicles and threatening the finances of buyers looking for a way to purchase, which are leaving them deeper in debt, new studies show.
Consumers set a new record for $1,000 monthly car payments in Q2.
Despite rising prices for used cars, an expanding number of car owners are finding they are “underwater” – meaning their vehicle is worth less than the balance they owe on the loan, according to new data collected by Edmunds.
More than one in four new vehicle trades are left with negative equity, Edmunds found, which requires refinancing to pay off that trade-in before they complete the purchase of a next vehicle.
The number of underwater loans is at a four-year high, Edmunds noted in a report released this week, amid signs of slowing new vehicle sales.
Not a new trend but it is getting worse
Experts worry new vehicle prices could surge to new records during the 2026 model year.
“Consumers being underwater on their car loans isn’t a new trend, but the stakes are higher than ever in today’s financial landscape,” said 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,” he added.
“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,” Drury said.
Deeper in debt
Buyers are increasingly “underwater,” carrying over more debt as they look to buy new vehicles.
Edmunds noted the average amount owed on upside-down loans during the second quartr of 2025 was $6,754, down slightly from the first quarter was $6,880. But that was up from $6,255 during the same period a year ago
In the second quarter of 2025. Edmunds figures show 32.6% of underwater trade-ins had between $5,000 and $10,000 in negative equity, compared to 31.9% in first quarter 2025 and 30.2% in second quarter 2024, and 23.4% owed more than $10,000, compared to 24.5% in Q1 2025 and 20.7% in Q2 2024, while 7.7% owed more than $15,000, compared to 8.4% in Q1 2025 and 6.8% in Q2 2024.
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.
More Consumer News
- Buyers Face Tougher Loan Conditions, Falling Incentives
- Record Number of Care Buyers Spending Over $1,000 a Month on Loans
- Car Prices to Rise Average $2,000 as Tariffs Take Hold
Fed refuses to reduce interest rates
The Federal Reserve on Wednesday opted to keep interest rates at their current level despite pressure from President Donald Trump. Two members of the board, including one actively campaigning to replace Chairman Jerome Powell, broke the board’s traditional unanimity by casting dissenting votes. That was the first since the 1990s this happened.
Powell, appointed by Trump during his first term but now a a frequent target of the president, said after the meeting inflationary pressure remained at relatively high levels, prompting the board decision not to lower the Fed’s “funds rate” on loans to banks. The fund rate influences — but does not dictate — the rates for consumer-facing loans on mortgages, car financing and credit cards. Those rates have not declined much in the past few months despite previous Fed rate cuts.
In his prepared remarks, Powell said the federal funds rate was “moderately restrictive,” and said the Fed needs more data on the effects of Trump’s tariffs before dropping the funds rate to 4.25% from 4.5%.
The U.S. economy has remained resilient despite the turmoil around Trump’s tariffs. The unemployment rate fell slightly to 4.1% in June and has remained basically stable over the past 12 months. The second quarter GDP growth increased 3%, bouncing back from the 0.5% contraction in the first quarter.
Car prices set to climb
Meanwhile, a separate forecast from Cox Automotive predicts a jump in prices as carmakers begin rolling out 2025 models this summer.
Since April, Cox noted, transaction prices have held steady as automakers so far have not passed along added tariff costs to the consumer. But profits have begun feeling the impact of the trade war, General Motors, Stellantis and Volvo all reporting billion-dollar hits to their bottom line. All three automakers forecast large increases in tariff costs during the second half of this year.
The pricing scenario is likely to change as model year 2026 vehicles begin arriving at dealer lots, according to Cox.
“an expanding number of car owners are finding they are “underwater” – meaning their vehicle is worth less than the balance they owe on the loan”
Are vehicles ever worth more than the balance of the loan???? Ever???
Absolutely. That’s the point. Normally, when owners go to trade in they have some net worth after 3, 4 or 5 years, depending upon the length and size of the loan. It’s only rarely — at least it has been traditionally — when you wind up with such large deficits. And that’s despite used vehicle values running at or near record levels.
Paul E.
For most loans, you’re ‘underwater, before the ink dries on your purchase agreement. Nothing new here.
Actually, yes, being underwater is obviously the nature of a loan, as you say, right after purchase. The question is how long are you owing more than you’d get on a trade-in. That’s where things have gotten bad for many buyers who still have 4- and even 5-figure deficits at a time when buyers traditionally trade in.
Paul E.