Negative auto loan equity is creeping up toward all-time high

An increasing number of U.S. car owners owe more money on their auto loans than their vehicles are currently worth, according to a new study by Edmunds.

Growing concerns: The report highlights several auto finance finance data trends, noting, in particular, that negative equity is increasing at a fast pace.    

• 24.2% of trade-ins toward new vehicle purchases had negative equity, up from 23.9% in Q2 2024 and 18.5% in Q3 2023. 

• Although the percentage of trade-ins with negative equity is still lower than the record in Q1 2021 (31.9%), the average amount owed on upside-down loans climbed to an all-time high of $6,458 last quarter, compared to $6,255 in Q2 2024 and $5,808 in Q3 2023.

Deeper dive: Even more concerning is the amount that a growing number of consumers owe on car loans. 22% of vehicle owners with negative equity owed $10,000+ on their car loans, and 7.5% of vehicle owners with negative equity owe $15,000+.

What they’re saying: “A combination of uncontrollable market factors and misguided consumer financial decisions are contributing to the rise of this troubling trend," said Jessica Caldwell, Edmunds' head of insights. 

"On the market factor side, many consumers who purchased new vehicles during the inventory crunch of 2021-2022 paid over MSRP, so they didn't chip away at the principle of their loans in a traditional manner. On top of that, trade-in values for near-new vehicles are taking a hit as automakers reintroduce incentives.

Scope of impact: Contrary to what many might think, the negative equity associated with auto loans is prevalent across all vehicle types being traded in, which speaks to the depth of the issue, according to Edmunds. 

As an example, while many might be quick to associate negative equity with higher priced or luxury vehicles, the data revealed that in Q3 2024, midsize SUVs, compact SUVs and large trucks made up 19.5%, 17.3% and 10.3%, respectively, of all vehicles traded in with negative equity.

Why it matters: The growing rise and amount of negative equity with auto loans not only directly impacts consumer confidence – it also can affect dealership inventories. Consumers will likely be less willing to trade-in their cars if they’re underwater on their loan — adding to the challenges many dealers already face to find good high-quality used cars.

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