Nearly three in ten US car trade-ins are underwater

Nearly 29 percent of Americans who traded in a financed vehicle against a new car in the third quarter owed more on the old loan than the car was worth, according to an Edmunds analysis published on October 21. The average shortfall, $7,107, was the highest third-quarter figure in at least a decade and more than $1,800 above the $5,000-to-$5,500 deficits typical between 2016 and 2019.

The debt does not vanish at the dealership; it is refinanced into the next car. Buyers who rolled negative equity into a new loan financed an average of $57,235, 44 percent more than in 2019, at an average rate of 8.1 percent, above the 6.81 percent market average JD Power projects for October. Their monthly payments average $952, up from $646 in 2019, and Edmunds expects about $16,610 in interest over the life of those loans, nearly 83 percent more than in 2019. More than 91 percent of these borrowers signed terms of 72 months or longer; they financed about $12,600 more than the average new-car buyer and pay an additional $165 a month.

The pandemic briefly inverted the pattern. Vehicle shortages and surging used-car values left owners with more equity than expected, even early in their loans: by early 2022 only 14.7 percent of financed trade-ins were underwater, with average deficits below $4,300, according to Jessica Caldwell, Edmunds' head of insights. The firm attributes the current trend partly to vehicles bought during the pandemic-era supply shortage at unusually high prices, which are now arriving at trade-in worth less than their loans. JD Power expects 29.6 percent of October trade-ins to carry negative equity, up 0.6 percentage points from a year earlier, and 13.3 percent of new-vehicle loans written this month to run 84 months or longer.

New-vehicle prices have themselves stopped climbing: JD Power projects the average October transaction price at $46,329, down 0.1 percent from a year earlier. The average monthly finance payment will set an October record at $823.