WASHINGTON (TNND) — More Americans are underwater on car loans, owing more money than ever. Nearly a quarter of trade-ins toward new car purchases are now burdened with negative equity. According to an analysis by car shopping experts at Edmunds, the average negative equity for these upside-down car loans has surged to over $6,800, with one in four borrowers owing more than $10,000.
“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.”
The situation has worsened since the COVID-19 pandemic, which caused an inventory shortage and drove up demand, leading people to pay more than their cars were worth.
“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.”
Experts advise keeping a car for as long as possible, ideally for the entire loan, and opting for the shortest loan term feasible; six or seven years is way too long.
Auto loan debt is the second-largest category of consumer debt in the United States, trailing only mortgages. Americans owe a staggering $1.644 trillion in auto loan debt, accounting for 9.2% of total consumer debt, according to the Federal Reserve Bank of New York.
In a related development, auto loan rates are expected to decrease slightly in 2025, with Bankrate experts predicting a drop to 7% from last year’s high of 8.58%.
“Bank auto loan rates showed little in the way of improvement in 2024 but expect that to rev up in 2025 as the economy motors along, banks look to spur loan demand, and the Fed helps by cutting interest rates further,” explained Greg McBride, Bankrate Chief Financial Analyst.
However, car prices remain high, having increased by 20-25% since 2020, with the average amount financed for a car now at $38,000.
For those looking to buy a home, experts warn of a volatile year for mortgage rates.
“The average 30-year fixed mortgage rate will spend most of the year in the 6s, with a short-lived spike above 7 percent, but never getting below 6 percent,” McBride says. “Continued economic growth and worries about inflation and government debt will keep mortgage rates elevated.”
According to Bankrate, rates are not expected to return to the 3-4% range, they could settle at 6.5% by the end of the year, down from over 7% last year. The housing market, like the auto industry, has faced inventory challenges, but levels are improving, offering buyers more options.
