On June 20, 2024, a number of cars were observed parked in the lot of a Chevrolet dealership in Chicago, as reported by Scott Olson for Getty Images News. A recent report from Edmunds.com highlights an increasing trend among Americans with auto loans who owe more on their vehicles than the vehicles are worth. According to the auto data and consumer research company, the average amount owed on so-called upside-down loans reached a record high of $6,458 in the third quarter. This marks an increase from $6,255 in the previous quarter and $5,808 a year earlier.
Upside-down car loans, while not inherently problematic, reflect growing financial pressure on American consumers. The Federal Reserve noted last month that auto loan delinquency rates have risen significantly above pre-COVID-19 levels, having dropped to historical lows during the global health crisis. Edmunds’ head of insights, Jessica Caldwell, expressed concern about the substantial number of individuals with negative equity, particularly those with $10,000 to $15,000 more owed than their cars are worth.
According to Edmunds, more than 20% of consumers with negative equity owe over $10,000 on their vehicle loans, with 22% of such vehicle owners owing $10,000 or more, and 7.5% having negative equity over $15,000. Edmunds suggests that consumers can mitigate upside-down car loans by retaining their vehicles for extended periods and ensuring regular maintenance to prevent further value depreciation and cost implications.
Ivan Drury, Edmunds’ director of insights, advises consumers to consider more than just the monthly payments when purchasing vehicles, emphasizing the importance of being realistic about ownership habits, particularly with high prices and interest rates. Drury warns that a seven-year auto loan may lead to negative equity for those who do not plan to keep a vehicle for that duration.
The rise in upside-down loans is attributed to consumers purchasing new vehicles in 2021 and 2022 during a period of limited inventory caused by the COVID-19 pandemic and parts shortages. Many consumers paid at full price or higher, causing their vehicles to depreciate more quickly than anticipated as the auto industry and inventories began to stabilize.
