The Rising Tide of Negative Equity Among Car Buyers

A significant trend is emerging in the automotive market, with approximately 30.5% of new-car buyers who trade in their vehicles facing negative equity, meaning they owe more on their loans than their cars are worth. This figure represents a 4.2 percentage point increase from the previous year, according to J.D. Power's automotive forecast for March 2026. The average amount of negative equity has reached an all-time high of $7,214, with 27% of trade-ins carrying $10,000 or more in negative equity. This situation has been exacerbated by the pandemic-era supply chain crisis, which inflated vehicle prices and led to a cycle of dependency on credit.

CNBCNearly 1 in 3 Car Buyers Are Underwater on Trade-Ins

Negative equity arises when a borrower’s outstanding loan balance exceeds the current market value of their vehicle. Many buyers, particularly those who purchased vehicles during the pandemic, are now experiencing the consequences of inflated prices and extended loan terms. The average monthly payment for buyers rolling negative equity into new loans has surged to $916, significantly higher than the average payment of $772 for all new-car purchases. This trend indicates a troubling financial landscape where consumers are increasingly trapped in a cycle of debt.

Nearly 1 in 3 Car Buyers Are Underwater on Trade-InsCNBC

The implications of rising negative equity extend beyond individual buyers. As consumers face higher monthly payments and longer loan terms, their disposable income is constrained, limiting their ability to make future purchases. This situation poses a risk to the broader economy, as a market where nearly one-third of trade-ins carry negative equity may lead to a slowdown in new vehicle registrations. The normalization of negative equity could signal a shift in consumer behavior, where buyers prioritize immediate access to vehicles over long-term financial health.

Nearly 1 in 3 Car Buyers Are Underwater on Trade-Ins

Industry experts express concern over the normalization of negative equity as a standard feature in vehicle transactions. Critics argue that this trend reflects a broader issue of over-leveraging among consumers, which could have long-term repercussions for financial stability. The reliance on asset financing, particularly in markets like Kenya, where the second-hand vehicle market dominates, raises alarms about the potential for widespread financial distress among middle-class consumers.

Nearly 1 in 3 Car Buyers Are Underwater on Trade-Ins

Tyson Jominy, a senior vice president at J.D. Power, noted that the recent rise in negative equity is part of a trend toward mean reversion following the pandemic. Joseph Yoon, a consumer insights analyst at Edmunds, emphasized that while negative equity levels are not new, the current amounts are particularly concerning. He stated, “The amount underwater that is the real, and troubling, story.”

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As the automotive market adjusts to these challenges, consumers are encouraged to prioritize equity over accessibility. Experts suggest that delaying new purchases and focusing on paying down existing loans may be prudent strategies for avoiding the pitfalls of negative equity. The shift from a credit-driven market to one that emphasizes financial discipline may reshape consumer behavior and the future of vehicle financing.

Nearly 1 in 3 Car Buyers Are Underwater on Trade-Ins