A growing number of consumers are trading in cars that are worth much less than the remaining balance on their auto loans. This situation, known as being “upside down,” is becoming more common, with consumers facing record amounts of negative equity on their loans. This trend has left many individuals struggling to afford their next car purchase, especially when considering the high amounts they still owe on their current vehicles.
According to research from Edmunds, around one in four trade-ins during the fourth quarter of 2024 involved negative equity. This means that 24.9% of trade-ins were “upside down” on their auto loans, which represents an increase from 20.4% in the previous year. Though the rate of negative equity is troubling, it is still lower than the 32.7% recorded in 2019. However, this shift highlights a concerning pattern in the auto industry, with more consumers facing financial strain when trading in their vehicles.
Record Amounts of Debt on Upside-Down Loans
The amount of debt owed on upside-down auto loans has reached an all-time high. On average, consumers owed $6,838 on their vehicles in negative equity. Even more alarming, 25% of consumers with negative equity owed over $10,000 when trading in their cars. For some, this number reached as high as $15,000, a staggering amount considering the age and condition of many trade-in vehicles, which are often less than five years old.
One reason for the rise in negative equity is that many auto loans, particularly in the early years, are front-loaded with interest. This means that monthly payments initially go toward paying off interest rather than reducing the principal balance. As a result, it can take years before the loan balance decreases enough for consumers to build equity in their vehicles. Additionally, the surge in used car prices following the pandemic temporarily shielded consumers from negative equity by inflating resale values. However, with car prices stabilizing, this cushion has largely disappeared.
The pandemic significantly affected the auto market, leading to supply chain disruptions and driving up prices for both new and used cars. Many consumers found themselves paying far above sticker price for vehicles, further increasing the debt they took on. As new vehicle production slowed, used car values skyrocketed, providing consumers with high trade-in values. However, as used car prices began to fall in 2024, the negative equity situation worsened, particularly for those who purchased cars in 2021 and 2022 at inflated prices.
Changing Market Conditions
New car prices have decreased slightly, with the consumer price index showing a 0.4% drop in new vehicle prices in 2024. However, used car values have experienced a more significant decline, falling 3.3% over the same period. This shift has made it harder for consumers to get a favorable trade-in value, exacerbating negative equity situations. For many, this means higher monthly payments and larger loans when purchasing a new vehicle. With longer loan terms and smaller down payments, many consumers are finding themselves in increasingly difficult financial positions.
Another factor contributing to negative equity is the length of modern car loans. Many buyers now take out loans with extended terms, sometimes stretching to six or even seven years. These lengthy loans often result in smaller monthly payments, but they also mean that consumers are not paying off the principal balance quickly. As a result, many find themselves stuck with a car loan they cannot afford to pay off, leading to the need to trade in their vehicle earlier than planned.
Electric vehicles (EVs) are at a higher risk of being upside down than traditional vehicles. EVs, being relatively new to the market, tend to depreciate faster, and their resale values are often lower than expected. In the fourth quarter of 2024, owners of EVs with negative equity owed an average of $10,186, a significant increase from the $7,116 owed by EV owners in 2022. Many EV owners also trade their vehicles in sooner than owners of gasoline-powered cars, further exacerbating the negative equity issue. This is particularly true for vehicles like the 2021 Volkswagen ID4, where the negative equity was around $10,446.
The Risks and Costs of Trading in an Upside-Down Vehicle
Consumers who are upside down on their loans often face additional financial burdens when they trade in their vehicles. The new loan for a replacement car can be much larger, with higher monthly payments and longer loan terms. On average, those trading in cars with negative equity in late 2024 were financing an additional $12,388 more than the industry average for new car loans. This also resulted in an average monthly payment increase of $159, placing even greater strain on consumers’ finances.
For consumers who find themselves upside down on their car loans, experts advise holding onto their vehicles for a few more years, if possible, to avoid further debt accumulation. Alternatively, leasing a car instead of buying may be a better option for those who prefer to trade in their vehicle every few years. Gap insurance, which covers the difference between the loan balance and the vehicle’s value in case of theft or a total loss, does not help with negative equity when trading in a car. Instead, focusing on managing the loan balance and making larger payments may help consumers regain financial stability.