An increasing number of U.S. citizens with auto loans now have debts that exceed the vehicle value, according to automotive resource firm Edmunds.

“The share of Americans who are upside down on their auto loans is on the rise,” Edmunds said in an Oct. 15 statement.

Upside-down loans are debts where the borrower’s loan balance is higher than the worth of the car. In the third quarter of this year, 24.2 percent of old vehicles traded in for new ones at dealerships had negative equity, up from 18.5 percent in the same period last year, according to the firm. People with upside-down loans are said to have negative equity in their vehicles.

“Consumers who are underwater on their car loans owe more money than ever before. The average amount owed on upside-down loans climbed to an all-time high of $6,458, compared with $6,255 in Q2 2024 and $5,808 in Q3 2023.”

Jessica Caldwell, Edmunds’ head of insights, blamed “uncontrollable market factors” and misguided financial decisions made by consumers for contributing to the trend of rising negative equity.

“On the market factor side, many consumers who purchased new vehicles during the inventory crunch of 2021–2022 paid over [Manufacturer’s Suggested Retail Price] MSRP, so they didn’t chip away at the principle of their loans in a traditional manner,” she said.

“On top of that, trade-in values for near-new vehicles are taking a hit as automakers reintroduce incentives. On the consumer behavior side, car shoppers have been increasingly opting into longer loan terms to reduce monthly payments, and they’re also trading in their vehicles earlier than is financially prudent.”

Caldwell noted that consumers owing $1,000 to $2,000 more in auto loans than their cars’ worth is not a big issue when trading in the vehicles. However, when these numbers hit the $10,000 or $15,000 levels, the situation is “nothing short of alarming.”

More than 20 percent of consumers with negative equity owed more than $10,000 in car loans, with 7.5 percent owing more than $15,000. Negative equity was found to be prevalent across all vehicle types traded in, including compact SUVs, large trucks, and midsize SUVs.

The rising share of upside-down loans could also indicate financial stress on American consumers, which can contribute to auto delinquencies.

A Sept. 26 report by the Federal Reserve noted that 30-day delinquency rates for auto loans have “risen considerably in recent years,” exceeding pre-pandemic levels. The jump in delinquencies was attributed mostly to loans that originated in the past two years.

“Loans originated in 2022 and 2023 have appreciably steeper increases in delinquencies” compared with the past years, the report noted.

Dealing With Negative Equity

Using an existing car for a longer period of time could help people avoid having negative equity in the vehicle, according to a post by credit reporting firm Experian.

“While this might not help you if your car gets totaled in an accident, it could help you avoid making the problem worse by trading in the vehicle when buying a new car,” the post reads.

“Remember, too, that depreciation typically slows down over time, so the longer you hold onto the vehicle, the better your chances of catching up with depreciation with your loan payments.”

Most cars lose about 20 percent of their initial value as depreciation in the first year, according to automotive research firm Kelley Blue Book. Within five years, 60 percent of the value tends to be gone.

According to the Federal Trade Commission (FTC), individuals can know whether the auto loan on a new car will include negative equity through the dealer.

“Before you sign a financing contract, the dealer must give you certain disclosures about the cost of that credit. Read them. Look for details about the downpayment and the amount financed on the installment contract,” the agency stated.

“You might have to do the math to understand how the dealer is handling your negative equity. Be sure you know before you sign the contract. Otherwise, you may wind up paying a lot more than you expect.”

For people with negative equity in their car and are looking to buy a new one, the FTC advises them to wait until they have positive equity in the existing vehicle. This can be done by paying down loans faster by making additional payments.