American consumers are increasingly underwater on their auto loans

DETROIT — A growing number of Americans with auto loans owe more than their cars are worth, according to a report released Tuesday from Edmunds.com.

Automotive data and consumer research company Average reports The amount owed on so-called flipped loans rose to an all-time high of $6,458 during the third quarter. This compares to $6,255 in the prior quarter and $5,808 a year earlier.

Upside-down car loans are not necessarily dire in and of themselves, but the presence of a growing number of underwater consumers is another indicator of the pressure on American consumers.

A sign of that strain appeared last month, when Federal Reserve Reported delinquency rates on auto loans rose well above pre-coronavirus pandemic levels through the end of 2023. They fell to historic lows during the global health crisis.

“Consumers having a significant amount or two more than their vehicle is worth is not the end of the world, but seeing such a notable share of individuals affected at the $10,000 or even $15,000 level is concerning,” Jessica Caldwell, Edmunds chief insights officer, said in a statement.

Edmunds reports that more than one in five consumers with negative equity owe more than $10,000 on their auto loans. This includes 22% of vehicle owners with negative equity who owe $10,000 or more, while 7.5% have negative equity of more than $15,000.

Consumers can counteract upside car loans by keeping vehicles for longer periods. They can also ensure regular maintenance is performed to avoid additional declines in value and costs, according to Edmunds.

“With prices and interest rates on the rise, it's important for consumers to think beyond the monthly payment and be honest with themselves about their ownership habits,” said Evan Drury, director of insights at Edmunds. “A seven-year car loan is a one-way ticket to negative equity if you know you're not the type to keep your car for the long term.”

The current situation of upside-down loans is largely due to consumers purchasing new vehicles in 2021 and 2022 amid inventory shortages due to the coronavirus pandemic and parts shortages. Many then paid full price or more, with the value of their cars declining faster than expected as the auto industry and inventories returned to normal.