Negative Equity Car Loans Surge: 39% of Drivers Are Underwater, EVs Hit Hardest
Negative equity, or owing more on a car loan than the vehicle’s market value, continues to rise as inflationary pressures and long loan terms take their toll on car buyers. CarEdge, in partnership with Black Book, surveyed 474 drivers in Q4 2024 to uncover the state of vehicle equity. Here are the highlights and the broader implications for drivers, car buyers, and the automotive industry.
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Negative Equity Is Increasing in 2024
In Q4 2024, 39% of drivers who financed their vehicles were underwater—up from 31% in Q3, a 25% jump. For cars purchased since 2022, the situation is even worse: 44% of these buyers owe more than their car is worth. As depreciation accelerates and long-term loans become the norm, the risk of negative equity continues to grow. This trend highlights a troubling financial burden on drivers and poses risks for the broader auto market.
Drivers Overestimate Their Car’s Value
Our survey reveals that 60% of drivers believe their car is worth more than its actual trade-in value. Of these, 18% overestimate by $5,000 or more, and 7% by over $10,000. This disconnect leads many to carry negative equity into their next car purchase, perpetuating financial strain.
When drivers attempt to trade in or sell their vehicles, they often face the harsh reality of lower-than-expected offers, which can derail their car-buying plans. Unfortunately, many choose to roll over the remaining debt into their next loan. This practice, while common, leads to higher monthly payments and extended loan terms, keeping buyers in a cycle of financial vulnerability.
Long Loan Terms Drive Negative Equity
Loan terms significantly impact vehicle equity. Borrowers with 84-month loans face a median negative equity of -$8,485, while those with shorter 36-month terms have a positive median equity of $7,783. While longer loans make monthly payments more affordable, they also leave buyers trapped in equity-negative positions for years.
For many buyers, the appeal of lower monthly payments outweighs the long-term risks. However, as loan balances decrease more slowly with longer terms, these borrowers are more likely to face financial strain when attempting to sell or trade in their vehicles. Buyers who opt for shorter terms and make larger down payments tend to build equity more quickly, putting them in stronger financial positions.
EV Owners Are Most at Risk
Electric vehicle owners face the highest negative equity rates, with 54% underwater and a median equity of -$2,345. This makes EVs particularly vulnerable compared to gas and hybrid vehicles, which are more likely to have positive equity.
The rapid depreciation of EVs is a key driver of this trend. EV technology can become outdated quickly as newer models with improved range, charging speeds, and driver assistance features enter the market. Additionally, concerns about costly battery replacements and limited resale demand have led many buyers to prefer new EVs with warranties and a known history, further impacting the resale value of used EVs.
For EV buyers, understanding depreciation trends and factoring in long-term costs is critical to avoiding significant negative equity. Opting for shorter loan terms and considering potential incentives or tax credits can help offset some of the financial risks. Buyers who plan to hold on to their EVs for longer than just a few years are less likely to be impacted by negative equity with their auto loans.
What Does This Mean for 2025?
As we head into 2025, the issue of negative equity looms large for both consumers and the auto industry. For car buyers, rolling over negative equity into new loans can lead to long-term financial stress, reducing their purchasing power and limiting options. For the auto industry, high levels of negative equity could dampen trade-ins and slow new car sales, forcing automakers and dealerships to adjust their strategies.
Car dealers also face challenges when appraising trade-ins with negative equity. To close deals, dealers may need to discount new vehicles more aggressively or offer creative financing solutions, which can erode profit margins. Over time, high levels of negative equity in the market can disrupt the typical sales cycle
Navigating the Negative Equity Challenge
The Q4 2024 Negative Equity Report paints a clear picture of a growing issue in the car market. Drivers, car buyers, and the auto industry alike must address the challenges posed by rising negative equity.
CarEdge remains committed to empowering consumers with tools and insights to navigate today’s challenging car market. To avoid falling into the negative equity trap, car buyers should prioritize shorter loan terms, be familiar with expected car depreciation, and monitor used car values with tools like Black Book. Overcoming negative equity is possible when drivers make informed car buying and ownership decisions.
