On June 20, 2024, a Chevrolet dealership in Chicago had cars displayed on its lot, as captured in a photograph by Scott Olson for Getty Images News.
According to a report from Edmunds.com released on Tuesday, a growing number of Americans with auto loans are in negative equity, meaning they owe more on their loans than the vehicles are currently worth. Edmunds, an auto data and consumer research company, noted the average amount owed on these upside-down loans reached a record $6,458 during the third quarter. This figure is an increase from $6,255 in the previous quarter and $5,808 from the same period last year.
Though upside-down car loans are not inherently catastrophic, the increasing numbers suggest mounting financial pressure on American consumers. The Federal Reserve reported last month that auto loan delinquency rates had significantly risen above pre-pandemic levels by the end of 2023, a stark contrast to the historically low levels experienced during the global health crisis.
Jessica Caldwell, Edmunds’ head of insights, commented in a press release that while owing an extra thousand or two isn’t critical, the significant proportion of individuals facing negative equity exceeding $10,000 or even $15,000 is alarming. Edmunds reported that over 20% of consumers with negative equity owe more than $10,000 on their auto loans, with 22% of these individuals owing $10,000 or more and 7.5% facing a negative equity of over $15,000.
To mitigate the issue of upside-down loans, Edmunds advises consumers to retain their vehicles for extended periods and perform regular maintenance to prevent further depreciation and costs. Ivan Drury, Edmunds’ director of insights, emphasized that with current high prices and interest rates, consumers should consider their long-term ownership habits beyond just the monthly payment. He warned that committing to a seven-year auto loan could lead to negative equity if consumers do not typically keep a vehicle for that duration.
The current situation with upside-down loans is primarily attributed to consumers who purchased new vehicles in 2021 and 2022 during a period of limited inventory due to the Covid-19 pandemic and parts shortages. Many paid full price or more at that time, resulting in their vehicles depreciating more rapidly than anticipated as the auto industry and inventories returned to normal levels.
