About 1 in 3 American drivers who financed their vehicle now owe more on their loans than their cars are worth, a rate that is continuing to grow as car prices increase and long-loan terms become more typical, a new survey report found.
The report from car-buying company CarEdge showed 31% of financing car owners are "underwater," meaning they have negative equity on their car loans. But that number goes up to 39% when considering only vehicles purchased since 2022, showing recent car buyers face a higher risk.
These rates increase when a car owner has a longer loan term as well as for those who own electric vehicles, the report states. For example, CarEdge's data showed those with 84-month loan terms are on average nearly $5,000 underwater compared to those with 36-month loans who have more than $12,300 in equity. And 46% of the EV owners it surveyed were found to currently be in negative equity, with luxury brands like Tesla and BMW putting more owners underwater than "budget" brands like Honda and Toyota, CarEdge said.
And with this negative equity comes a contradictory positive outlook for car owners who financed, with 61% of them overestimating how much their cars are worth, CarEdge found. The company's report shows 17% of its survey respondents believed their vehicle was worth at least $5,000 more than its actual trade-in value.
This "disconnect," CarEdge says, can "lead to unpleasant surprises" when a car owner tries to sell their car, often creating a new underwater cycle when the negative equity is rolled into their next car loan. This creates issues for not only the drivers but the auto industry, particularly for those in the EV or luxury space.
CarEdge's report comes as many auto buyers have turned to longer loans to maintain a manageable monthly payment in the current high-cost car market. Though August marked the 11th month that car prices were lower than they were the year prior, according to Kelley Blue Book, that's largely thanks to dealer and automaker discounts that push shoppers to the door, not because the true price dropped.
There are also differences among brands. Some of those that put owners at a less likely chance of being underwater — like Toyota and Honda, according to CarEdge — have the least amount of supply, so they're less likely to be offering discounts.
Plus, high interest rates have made it difficult for car buyers to find a good loan in the past few years. In September, however, the Federal Reserve cut interest rates for the first time in more than four years, which will slowly start to bring loan rates down.
