New data from Edmunds indicate that the loan balance on newly purchased cars has hit a new record of $43,899 with lower down payments than has been historically the norm. The data also show that 84-month or longer loans made up 22 percent of financed new-car purchases in the first quarter of 2026—an all-time high—compared with 20.8 percent in quarter four of 2025 and 21.2 percent in quarter one of 2025.
This is alongside interest rates of 6.9 percent. These are all the ingredients you need for a national fleet of cars carrying higher debt obligations than trade-in value, even after having been driven 50,000 miles.
Tighter money and supply limits contribute, but the real culprit is higher prices—that is, cars people cannot really afford. The price of cars has soared over five years during a time when real income has been flat. People are unwilling to forgo the perception of status attached to their cars and therefore find themselves in deep financial trouble.
It’s a truism known for decades that the moment you drive your car off the lot, its market valuation takes a hit. That’s not typically been a problem because, after all, you get use out of your car and are not planning to sell it anytime soon. It’s typically the case, then, that those who borrow to buy will be sitting on an asset that is called underwater.
What does it mean? It is a situation you find in any loan market when the asset is worth less on the market if resold than the loan obligation. This happened in 2008 with houses and led to many people simply abandoning their homes and inviting the bank to take them back, thus taking a credit-rating hit.
Think about this from a psychological standpoint. You are paying a high mortgage but you notice that the valuation of the underlying asset is falling more and more. It means that at some point selling the home is not enough to compensate you for what you owe on the property. The indebted owner realizes that he is burning thousands of dollars in cash on a monthly basis, not as an investment but merely as loan service.
It’s typically been the case that car owners are more willing to tolerate such a state of affairs for longer because, after all, they do have their cars and the burden of payment has not been exorbitant. That’s the reason the abandonment problem for cars and trucks is rare.
In general and over a long period of time, about 30 percent of auto loans are underwater. It simply means that the trade-in value is less than the balance of the loan. When this happens, the owed amount is rolled over to the new car loan, thus exacerbating the problem.
Now let’s move forward in time to 2020. It was a very strange year for cars. Manufacturers had long been used to just-in-time inventory strategies that had always worked in the past. With the COVID-19 pandemic lockdowns, cars were not selling, so manufacturers stopped completing cars and delivering them.
When, by late fall and winter, demand picked up again, manufacturers placed orders for the microchips that are essential for cars to operate. But by then, chip manufacturers had moved on to using facilities for other purposes such as gaming consoles and laptops. It was not possible to fulfill the orders. Meanwhile customers were lining up wanting cars.
Some manufacturers even resorted to shipping without power steering, because they could not get the chips to make it work.
That’s when prices began to rise for both new and used cars. Customers had put off purchases for months, and now they were desperate. They took out loans on cars priced $50,000–$80,000 while signing up for 72-month loan obligations with only $6,000 down, mostly coming from stimulus payments. These stimulus payments created an illusion of individual prosperity that was shattered a year later when inflation took off.
Here we are six years later, and many of these buyers are ready for trade-ins. They are trying to offload expensive cars and perhaps fix up their personal finances. Seems reasonable. In truth, they cannot because the loan value far exceeds asset equity. They take their car to the dealer only to discover that they still owe more on the car than it is actually worth.
If they get a new car, their existing balance is rolled over to a new loan obligation for the new car. That’s when the problem gets even worse. No problem is solved, but rather the reverse. They made a mistake years ago, and now there is no one on whom to flick their fleas in the form of debt obligations.
Who benefits from these schemes? It’s the dealership’s loan offices, which enjoy a nice 4 percent interest rate. Also customers who use such services lose bargaining power over price and end up paying more for a car than they otherwise would if they were paying cash.
Yes, these people could drive up to the dealership, park the car, leave the key, and stop paying. That will satisfy the repo man, but it will also completely wreck one’s credit rating for the next 10 years. No chance of getting another loan. Also now you are stuck without a car and instead using very highly priced ride-sharing services. (Remember when Uber was a good deal? That’s no longer true.)
This is a serious problem that is now eating household finance at a time when mortgage rates are rising, medical insurance costs are rising, taxes are rising, and the value of the dollar in terms of goods and services has experienced a 25–30 percent depreciation over six years. There are very few people whose income has kept up with these tight financial circumstances.
If I may add a bit of personal advice that does not help the people who are suffering now: Everyone loves a new car. I get it. That said, it is financially unwise to buy new. The point of transportation is not to show off, pretend to occupy a higher place on the social pecking order, or otherwise pretend to have money you do not have.
The point of a car or truck is to get you from here to there. That means it needs to start, roll, and stay in relatively good condition so that it does not land in the shop. Ideally you pay cash for this car. In my own view, this should be the standard: Only buy a car for which you can pay cash. That nearly always means buying a used car. Indeed, I’ve never understood why anyone would buy a new car off the lot. It’s always struck me as crazy unless you just have money to burn.
Years ago, I had a firm rule: Pay no more than $5,000 for a car. This is why I’ve driven used cars all my life. That price ceiling is no longer viable. The equivalent today would be probably $20,000. I just looked up quality cars in my area at that price and found excellent options. At this point, the draw of Chinese cars seems nearly inevitable: higher value at half the price.
Meanwhile, there is nothing disreputable about buying a used car. It can be the most rational choice. Now is the time. Actually the time was six years ago! That does not help those who are holding debt obligations that are higher than the trade-in value of the underlying asset. But it is good advice for the future.
