October 26, 2024
Do you owe more on your car than what it’s actually worth? If so — you’re not alone – more and more Americans are actually upside down on their car loans and the average amount they owe just hit an all time high.. And here’s the thing – these numbers really give us a window into the overall financial health of borrowers.
First — I want to explain what “upside down” means in this context. It just means you owe more on the thing you bought than what the thing is now worth. So here’s what we know about upside down car loans and why it matters.
The federal reserve says auto loans account for about 25% of non-mortgage debt in this country and as I said – this type of debt is one of the things that they look at when monitoring the financial well-being of a household.
This third quarter negative equity report came from Edmunds – which is an online car shopping website that tracks all kinds of things – including auto financing data. The report found from July to September of this year more than 24% of trade ins had negative equity – that means the owners of those trade ins were upside down on those loans. That’s up from the second quarter of 2024 and up more than 30% from the third quarter of 2023.
Of that 24%– 22% of car owners were upside down on that loan — more than $10,000. And 7.5% of them were upside down more than $15,000. Edmunds says the average amount that was owed on an upside-down car loans in the third quarter was $6458. That is an all time high. That’s more than the second quarter of 2024 and up 650 bucks from the third quarter of 2023. The types of vehicles with the most negative equity – midsize suvs, compact suvs and large trucks.
So why is this happening? According to Edmunds it’s a combination of things – “uncontrollable market factors and misguided consumer financial decisions.” That’s corporate speak for a supply chain issues with inventory and buyers making not so great financial decisions. So – let’s talk about those uncontrollable market factors – most of these cars I’m talking about in this report were purchased during the supply chain breakdown and inventory crunch of 2021 and 2022. And if you remember back then — people were paying over msrp for those vehicles – which means they started out in the hole and when they were paying on their loan they weren’t necessarily chipping away at their principle. On top of that now – trade-in values for two and three year old vehicles are taking a hit because automakers have inventory on their hands so their buying incentives are back. As for the misguided financial decisions Edmunds says car shoppers have increasingly been opting into longer loan terms to reduce their monthly payments but then they’re trading their vehicles in earlier than they should for it to make financial sense. But Edmunds is clear this is *not* a case of folks buying luxury cars and not being able to afford them. No. This problem is across the board.
Look – owing a few grand on your car isn’t new and it isn’t the end of the world – but what is new and what Edmunds says is “alarming” is the amount of borrowers who are upside down more than $10,000.
Read the Edmunds Q3 report here.
