Americans Have Record Debt When Trading In Cars, and the Situation Continues to Worsen

Auto Loan Financial Crisis

Forget about Demogorgons and eerie parallel worlds – there is a much scarier “upside down” than in the “Stranger Things” series, and it is trapping American car buyers. The world of auto lending has been turned upside down, and the numbers are enough to baffle even experienced lenders.

According to a new report, the average amount of debt for “underwater” auto loans, when drivers owe more than their car is worth, has risen to a record $6,905.

This means the average driver in the US is so deep underwater that they would need to be a champion freediver to safely return to the surface.

And unlike the gloomy world in the Netflix series, this “upside down” is filled not with monsters from another dimension, but with very real problems such as rising interest rates, extended loan terms, and rapidly falling car values.

Why Are Drivers Falling into a Debt Trap?

According to the latest data from Edmunds, over a quarter of new vehicle trade-ins are associated with debts exceeding the car’s value. This indicator reached a four-year high, increasing from 24.2 percent in the first quarter of 2025 and 26.6 percent in the second, to 28.1 percent in the most recent period.

Yes, an even larger number of drivers – 31.9 percent – were in a similar situation back in the first quarter of 2021, but back then they owed less money ($6,880 versus $6,095).

Nearly one in three owners with debt owe between $5,000 and $10,000, which is yet another new record, and nearly one in four is burdened with debt over $10,000. Think about that for a minute.

How Did the Situation Become So Complicated?

Edmunds reports that the problem has been brewing for years. During the pandemic, car prices skyrocketed, and buyers stretched their budgets using record-long loans to purchase new vehicles.

Now, as used car prices normalize and interest rates remain high, those same buyers are finding their cars are worth thousands less than they still owe. It’s a slow-moving financial drama unfolding on driveways across the country.

In 2020, the average negative equity was just over $5,000, but the gap has grown by 40 percent over six years, forcing many buyers to roll more borrowed money into their next auto loan. Add a few extra options, and that new $40,000 car you were looking at turns into $50,000.

In fact, we recently reported that the average transaction price for a new vehicle in the US crossed the $50,000 mark for the first time after more than a year of steady growth.

Ways to Solve the Problem

Edmunds analysts say there is no quick fix for drivers with debt, but the best way to avoid deepening the problem is to resist the temptation of an early trade-in and think carefully about whether you can really afford – or even need – the next car.

Negative Equity 2019-25

Source: Edmunds

This trend reflects the broader economic challenges households face as the rising cost of living outpaces income growth. The Federal Reserve’s interest rate hikes to combat inflation directly impact credit affordability, making auto loans more expensive for consumers. Additionally, the rapid depreciation of new cars after they leave the dealership means many owners can find themselves in a situation where their asset is quickly losing value while their liability remains unchanged.