Americans increasingly underwater on car loans: Edmunds

( NewsNation ) — A growing number of Americans owe more than their vehicle is worth and those who are underwater on their loans owe a record amount.

Last quarter, nearly one in four consumers (24.2%) who financed a new vehicle with a trade-in were underwater on their prior loan, up from 18.5% a year earlier, according to new data from Edmunds.

The average amount owed on those so-called upside-down loans hit an all-time high of $6,458 — an 11% jump from $5,808 during the same period a year ago.

For many, the negative equity situation was far worse. Edmunds found that more than 1 in 5 consumers who were underwater owed more than $10,000 on their auto loans. And 7.5% of those with negative equity owed more than $15,000.

Jessica Caldwell, Edmunds’ head of insights, called those data points “nothing short of alarming.”

The report cited several reasons for the trend.

During the inventory crunch of 2021-2022, many consumers paid over MSRP, so they didn’t pay down the principle of their loans “in a traditional manner,” Caldwell noted.

Trade-in values for “near-new” vehicles have also taken a hit, as more automakers have reintroduced incentives to entice buyers in today’s elevated interest rate environment.

“On the consumer behavior side, car shoppers have been increasingly opting into longer loan terms to reduce monthly payments, and they’re also trading in their vehicles earlier than is financially prudent,” Caldwell said.

Another point worth noting: Negative equity was prevalent across all vehicle types from compact SUVs to large trucks.

“It’s easy to assume that only specific consumers trading in higher-ticket luxury vehicles are the ones underwater on their car loans, but the reality is that this is a problem across the board,” said Ivan Drury, Edmunds’ director of insights.

Consumers who are worried about slipping into negative equity should try to hold onto their vehicles as long as possible and keep up with maintenance to preserve their car’s value, the report noted.

Edmunds’ analysts also recommended buying cars with higher resale values. Brands like Toyota, Lexus and Honda rank near the top in several vehicle categories.

Although the share of trade-ins with negative equity has risen recently, upside-down loans are still less common compared to pre-pandemic.

In the third quarter of 2019, 34% of trade-ins had negative equity — roughly 10 points higher than the latest quarter, according to Edmunds.

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