Negative Equity Surge: Average Amount Owed on Underwater Car Loans Reached a Record High in 2024

From July through September 2024, 24.2% of Americans who traded in their car toward a new vehicle purchase  had an underwater (or upside down) loan – meaning, they owed more on the trade-in than it was worth.¹ But why is this happening, what is the scale of the problem, and what can dealers do to continue to make sales? Let’s explore the ins-and-outs of the rising phenomenon of underwater car loans across America.

What’s happening with car loans? 

While the percentage of underwater loans represents a rise on previous periods – but not an all time high – the average amount owed on those loans reached a true record in the third quarter of 2024, at $6,458.²  Worse yet, of those individuals with negative vehicle equity, more than one in five owed over $10,000 on that loan.³ And while underwater car loans aren’t necessarily dire on a case-by-case basis, a growing trend could indicate mounting consumer pressure, and can deeply affect the sales patterns at dealerships. 

Why are they underwater? 

So, what exactly is the story behind these numbers? There are many facts at play here. First, this situation can largely be attributed to consumers who purchased new cars during the pandemic in 2021-22, when – as most dealers remember – there was a significant lack of inventory and massive parts shortages. In many cases, these customers paid more than full price or MSRP, and then saw their cars depreciate faster than anticipated when inventory levels balanced out again shortly after.²

Then, because consumers purchased their vehicle for a higher price, they weren’t paying down the principal of their loans.³ Add to that a mounting trend where consumers seem to be opting for loans periods longer than the standard four years, and then trading in their vehicles faster than makes financial sense.³

When these customers then go to trade in their car for a new one, if they don’t have the money to pay off the existing loan, the negative equity rolls into their new loan, which only spurs a long cycle of debt.³ These longer term loans may be desirable for consumers who are looking to lower their monthly costs, but when we see over 18% of new vehicle loans opting for 84 month terms, there is cause for concern, since most of those consumers won’t be planning to keep that vehicle for seven years.³ Add to that the anomaly that even with these longer term loans, many customers are taking on monthly payments of over $1,000 at record levels. Customers signing up for long-term loans over that price comprised 17.4% of new-car buyers in the third quarter of 2024.⁴ 

What options do customers have?

To avoid the underwater loan situation, consumers can attempt a few strategies:

1. Hold onto vehicles for longer periods. 
2. Perform regular maintenance to avoid any additional depreciation. 
3. Think beyond the monthly payment cost and get honest about the total cost of ownership and your trade-in habits.²
4. Choose a car they plan to keep for several years¹ 

How can dealers secure a trade-in purchase from their customers?

1. Roll the customers’ negative equity into a new loan 
2. Encourage your customers to choose cars that are more reliable or have better gas mileage to help them save money in the long term. 
3. Pitch sales of cars that depreciate less, such as Hondas or Toyotas. 
4. Help your customers choose a trade-in for a used vehicle of an equivalent value that they are likely to be able to pay, based on their history. 
5. Offer incentives like lower APR financing whenever possible. 

Accurate, Instant Appraisals with ClearCar

It’s possible you might see more customers that have negative equity research the value of their car before making a decision to trade it in. With ClearCar a customer can easily get an accurate price on their vehicle within minutes just by answering a few questions. As a dealer what makes ClearCar such a great appraisal tool is it’s ability to tap into the ACV ecosystem, leveraging real-time market data and insights into the vehicle’s history to provide accurate and reliable vehicle valuations aligned with the vehicle condition.  Learn more about how ClearCar can benefit your dealership.

‍
‍

Sources

1. Lee, Medora. October 18. 2024. “So you’re upside down on your car loan. You’re not alone.” USA Today. Retrieved October 28. 2024. https://www.usatoday.com/story/money/personalfinance/2024/10/16/upside-down-car-loans-americans-owe-record-amount/75686795007/
2. Wayland, Michael. October 15, 2024. “American consumers are increasingly underwater on their car loans.” CNBC. Retrieved October 28, 2024. https://www.cnbc.com/2024/10/15/american-consumers-are-increasingly-underwater-on-their-car-loans.html
3. Singletary, Michelle. October 16, 2024. “Many Americans are car poor from their auto loans. Here’s why.” The Washington Post. Retrieved October 28, 2024. https://www.washingtonpost.com/business/2024/10/16/underwater-car-loans-hit-new-record/
4. Edmunds. October 15, 2024. “Negative Equity on the Rise: The Average Amount Owed on Upside-Down Car Loans Hit an All-Time High in Q3 2024, According to Edmunds.” Edmunds. Retrieved October 31, 2024. https://www.edmunds.com/industry/press/negative-equity-on-the-rise-the-average-amount-owed-on-upside-down-car-loans-hit-an-all-time-high-in-q3-2024-according-to-edmunds.html