Almost one-third of American car buyers with a trade-in owe more than the vehicle is worth, new industry data show.
About 30.5 percent of buyers trading in a car toward a new vehicle maintained negative equity, according to a JD Power report released on March 26.
This is up 4.2 percentage points from a year ago and has been steadily rising since 2022, “as consumers who purchased during the peak of inventory shortages 4 years ago return to market,” said Thomas King, president of OEM Solutions at JD Power.
“Regarding total consumer spending on new vehicles, the elevated transaction prices in March aren’t enough to offset the inflated sales pace a year ago,” King said. “Consumers are on track to spend $49.4 billion on new vehicles this month, 13.9 percent lower than a year ago.”
Growing auto debt has become a significant challenge in the current car climate, as many motorists are enduring the consequences of their financial decisions during the COVID-19 pandemic.
Edmunds, a subsidiary of CarMax, reported in January that the average amount owed on underwater trade-ins during the fourth quarter was a record $7,214. Additionally, 27 percent carried $10,000 or more in negative equity—also an all-time high.
If a buyer trades in a vehicle with negative equity, the remaining balance is typically folded into the financing for their next car. That rollover effect, according to Edmunds data, has pushed the average monthly payment for these borrowers to an all‑time high of $916.
Many underwater trade-ins can be traced back to pandemic‑era loans. At the time, chip shortages slashed inventories and wiped out incentives. Buyers paid close to or above the manufacturer’s suggested retail price—the sticker price automakers recommend a dealer charge for a new car—and had limited ability to choose cheaper models.
Because leasing was limited, many drivers opted to purchase these vehicles with loans, incurring different financial costs. Years later, the loan balances surpassed the cars’ value.
The auto market—and the typical depreciation—has since stabilized, but these loans were originated during a period of elevated prices. That mismatch has widened the gap between purchase prices and current trade‑in values.
The 7-Year Loan
Kelley Blue Book figures reveal that car prices have accelerated over the past year. The average new-vehicle transaction price was firmly above $49,000—hovering near record levels—in February.“Sales are no longer swinging wildly month to month, but growth is also harder to come by,” Charlie Chesbrough, senior economist at Cox Automotive, said in a March 25 note. “Affordability remains the central challenge for the industry, and that is limiting the market’s ability to expand beyond the mid-15-million range.”
Borrowing costs also remain elevated; the average auto loan interest rate is close to 7 percent.
Current conditions have forced car buyers to take on seven-year loans. An estimated 41 percent of new-car purchases involving negative equity are financed with 84-month loans.
It is unclear whether these numbers will lead to significant pressure on consumers. So far, the data indicate that buyers are not falling behind.
TransUnion says about 1.5 percent of auto loans are 60 days past due. The New York Fed reports that the share of loans in serious delinquency—90 days or more—stands at nearly 3 percent.
In total, Americans owe $1.7 trillion in auto loan debt, a figure that has soared by 56 percent in the past decade.
Although lenders take into account a wide array of factors to price interest rates—credit risk, consumer-loan dynamics, and funding costs—they also loosely track yields on Treasury securities, particularly the five-year government bond.
The five-year Treasury yield has spiked over the past month amid the war in Iran, reaching about 4 percent from its pre-conflict level of 3.5 percent.
In addition to high car prices and borrowing costs, drivers are contending with increasing pain at the pump. The national average price for a gallon of gasoline is close to $4, according to the American Automobile Association.
