A growing number of Americans are carrying thousands in negative equity into new auto loans, raising monthly costs. The trend is especially relevant in California, where high living expenses are already straining many Latino households.
More than 3 in 10 Americans (30.9%) are trading in a vehicle on which they owe more on their loan than the car is worth, according to a new report from Edmunds.
It found that the average underwater trade-in is $7,183 in negative equity, the highest ever for a Q1 and second-highest quarter on record. This amount is up 42% compared to the same period five years ago.
The average new-vehicle monthly payment for a buyer rolling negative equity into their new loan is $932, which is $159 more than the typical car buyer.
Cheap money never really disappears. It just shows up later, dressed differently, asking to be paid back. That is the lesson buried in almost every American consumer crisis of the past two decades.
Sticker prices jumped. Dealer markups stuck. Interest rates climbed in the same window. To make any of that math work on a household budget, buyers stretched loans to seven and even eight years and signed monthly payments that would have seemed absurd before the pandemic. Then they drove off the lot losing money the moment the tires hit the road.
That bill is now coming due. About one in three Americans trading in a car this year owes more on the loan than the car is worth, with the average gap setting near-record highs, according to The Wall Street Journal.
Jessica Caldwell, AVP of Insights at Edmunds, posted: “It’s compounding,” she said.
She writes that a reinforcing cycle is creating higher balances, longer terms, slower equity growth and more debt that is carried into the next purchase.
“No longer a niche dynamic, negative equity is becoming a more persistent feature of the trade-in experience and a growing affordability challenge across the market,” her post says.
An article written by Caldwell says that “the percentage has been consistently climbing since 2022, when inflated used vehicle values caused by the pandemic-fueled chip shortage insulated more shoppers from carrying debt into their next vehicle. Now, as vehicle values normalize, more buyers are trading in vehicles that have plummeted in value since the pandemic-era shortage, leading to a surge in the amount of negative equity being rolled forward.”
What to do:
If you are “underwater” on your car loan, the goal is to stop the cycle of debt. Here are the most effective strategies based on your current situation:
1. The Best Move: Stay the Course
The simplest way to fix negative equity is to let time do the work.
Don’t trade it in: Every payment you make reduces the principal balance.
the “break-even” point: Eventually, your loan balance will drop below the car’s market value.
Keep it maintained: Regular service ensures the car lasts longer than the loan term.
