Car buyers rolled a record amount of negative equity into new auto loans in the first quarter, and longer loan terms are increasing the amount of debt consumers bring to new loans, automotive pricing and insights company Edmunds said on April 20.
The average negative vehicle equity—also called being “underwater” or “upside-down” in automotive financing parlance—for vehicles whose loans are underwater at the time of trade-in jumped to $7,138 in the first quarter, the highest amount ever recorded in the first three months of a new year and a 42 percent spike from the same quarter in 2021, Edmonds researchers said.
The quarter saw 30.9 percent of vehicle trade-ins for new vehicles carrying negative equity, a number topped only by the 31.9 percent seen during the height of the COVID-19 pandemic in the first quarter of 2021.
“The percentage has been consistently climbing since 2022, when inflated used vehicle values caused by the pandemic-fueled chip shortage insulated more shoppers from carrying debt into their next vehicle,” Jessica Caldwell, Edmunds head of insights, wrote.
“Now, as vehicle values normalize, more buyers are trading in vehicles that have plummeted in value since the pandemic-era shortage, leading to a surge in the amount of negative equity being rolled forward.”
Term length is a key reason why a growing number of consumers are upside-down on their vehicles, Edmunds noted. Stretching loan terms to 72 months and 84 months lowers monthly payments, but it also widens the gap between depreciation and value since vehicles lose value more quickly in the initial years of ownership. Just over 90 percent of trade-ins with negative equity in the first quarter had at least six-year loan terms, and 43 percent had seven-year loan terms, Edmunds said.
Although vehicle owners are holding onto their automobiles longer—the average trade-in age of vehicles carrying negative equity was 4.3 years—it’s not enough to close the equity gap due to higher vehicle costs and elevated interest rates on automobile loans for underwater borrowers that averaged 7.9 percent.
“These longer and more expensive loan terms can help keep monthly payments within reach, but they also stretch out the time it takes for consumers to build equity in their vehicles,” Caldwell said.
The average finance rate in the first quarter for new vehicle loans with five-year terms was 7.52 percent, the Federal Reserve reported in early April. Average finance rate for seven-year vehicle loans, meanwhile, jumped slightly to 7.55 percent.
More than a quarter of vehicle trade-ins had negative equity exceeding $10,000, with 9.3 percent topping $15,000. That translated into record-high average payments of $932 per month for underwater borrowers financing new vehicle purchases, or nearly $160 higher than the broader market average.
“Negative equity doesn’t just reflect past purchasing decisions; it also shapes the next one,” Caldwell noted.
“It can limit trade-in flexibility, reduce access to lower-priced vehicles under lending constraints, and narrow the choices available to consumers when they return to market.”