The sudden jump in car prices after the pandemic is having its effect as payments on overpriced cars aren’t keeping up with what they’re worth. And that’s compounding the growing debt problem Americans face.

A new report from Edmunds shows a sharp year-over-year increase in the percentage of cars traded in with negative equity. Moreover, the amount that people owe has reached levels never before seen.

Joseph Yoon, consumer insights analyst with Edmunds, thinks it could be four years before the industry crests this growing trend.

“Depreciation doesn’t care what you paid for your vehicle,” Yoon said. “Depreciation is just what the car is worth at the end of the day. And if you paid over sticker for your car and you took out a longer loan or you took out a bigger loan than you would have liked to get the monthly payments down to a level that was more comfortable to you, and you go to trade in that car, you’re going to be shockingly underwater.”

The Average Amount Owed on Upside-Down Car Loans Is Higher Than Ever

25% of Negative Equity Trade-ins Had At Least $10,000 Owed

The percentage of cars traded in worth less than what’s owed reached nearly 25% in 2024, Edmunds reported. And while Yoon says negative equity has always existed — 32.7% in 2019, for example — the $800 average year-over-year debt increase is triggering alarms. Of those trade-ins with negative equity, more than 25% owe more than $10,000, Edmunds reports.

Yoon attributes much of that increase to the sudden spike in prices after the pandemic cleared dealers’ inventories. Car buyers paid well over MSRP, offsetting any advantages of low interest rates at the time, Edmunds reported in October 2024.

Meanwhile, consumers are willing to peg that deficit onto the debt of the new car. Paying for that value gap added $159 to monthly payments, Edmunds reported. On average, carryover debt added $12,388 to the total amount financed looking at purchases from October to December 2024. Both those figures are records.

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The $49,740 average transaction price in December 2024 neared the all-time high set in December 2022, according to Kelley Blue Book.

“With prices and interest rates being as high as they are, it’s critical for consumers to think beyond the monthly payment and be honest with themselves about their ownership habits,” said Ivan Drury, Edmunds’ director of insight in a news release. “A seven-year auto loan is a one-way ticket to negative equity if you know you’re the type of person to keep a vehicle for that long.”

Auto Loan Debt Compounded Americans’ Growing Debt Problems

Consumers are finding themselves at the tipping point as they take on longer loan terms, said Bruce McClary, senior vice president with the National Foundation for Credit Counseling.

The National Foundation for Credit Counseling is a nonprofit nationwide network of credit counselors.

Nearly 70% of new-vehicle loans had 60-month terms in Q3 2024, Edmunds reported. The number of 84-month terms rose to 18.1% that quarter, up from 15.8% at the beginning of 2024.

“Consumers are less shocked about 60-month auto loan terms than they would have been three decades ago,” McClary said. “More people are comfortable with 72 months or longer.”

And while cars are more reliable than in the past, maintenance costs continue upward.

“You have warranties that expire long before the balance is paid off. As the car ages, repairs get more expensive,” McClary said.

Higher monthly payments exacerbate other debt problems. Adding another $150 to a monthly payment greatly reduces available cash, meaning consumers turn to credit more often, McClary said.

Auto loan delinquency rates reached 3.8% in June 2024, according to the Federal Reserve Bank of New Year, a rate not seen since 2010.

Credit card default rates rose to the highest levels in 14 years, according to the Associated Press.

“There are a lot of people out there who have found themselves back in a situation where their debt is growing out of control and they need help managing it,” McClary said. “With interest rate averages at an all-time high, that just adds even more pressure to those people who are maxing out their credit card balances and are unable to continue making minimum payments.”

Negative Equity Rate Drop Still Three to Four Years Out: Yoon

Yoon expects another three to four years for the upward trend of underwater loans to subside. People who borrowed during the 2021 and 2022 boom did so with six-year loans.

But the problem is persistently high car prices. Likewise, the amount that people borrow continues to rise. Lower interest rates mean paying down the principal faster, but those have also remained persistently high.

“With all kinds of economic things right now, everybody’s holding their breath for a break in interest rates because that’s going to help the most,” Yoon said. “In my opinion, I don’t think we’re going to see huge discounts in the car market anytime soon.”

Some EV Deals Appearing but EV Industry on Shaky Ground: Yoon

Inventory levels have recovered since their historic lows in the pandemic. Buyers can find deals, but it depends on what you’re looking for, Yoon said. The high demand for compact hybrid SUVs, for instance, means a buyer will be hard pressed to find a deal on one.

Dealers can’t move electric vehicles as fast anymore, and so buyers can find good deals on them, said Yoon. Consumers don’t have the appetite for the high sticker price, and the people who want one already have one. The demand has largely plateaued, he said.

Making the jump to electric means answering big-picture questions that consumers don’t want to think about, he said. Potential buyers want to know the cost to plug in at home and if it’s advantageous to get solar.

“There’s all sorts of these new things you have to tackle if you consider getting into an EV,” Yoon said.

For example, the federal tax credit on electric vehicles is up in the air and the charging infrastructure isn’t there, Yoon said. But there are some positives. Manufacturers are moving toward standardizing the electric plug.

Money from President Joe Biden’s administration to build out the charging infrastructure has made its way to states, Yoon said, but it still needs to be spent. Earlier this week, President Donald Trump threatened to scuttle federal grants, which could have included money to build out electric chargers.