- More car owners are upside down on their car loans than ever before.
- Price hikes during an inventory shortage four years ago are to blame.
- Dealers who remained disciplined on pricing are now digging customers out.
Four years after a pandemic inventory crunch sent car prices to record highs, the number of drivers who can't afford their car loans is on the rise, worrying dealers who warn this will only compound a growing affordability problem in the market.
The share of car owners with "negative equity" — meaning they owe much more on their loan than the car is worth — was hovering around 24% at the end of 2024, according to data from car shopping website Edmunds. That's up significantly from around 18.5% in 2023.
The amount these customers are "underwater" on their loans is also on the rise, a concerning data point for dealers and car companies looking to stoke demand among increasingly budget-conscious shoppers.
The average amount owed reached an all-time high of $6,458 at the end of 2024, according to Edmunds, while more than one in five car owners owe more than $10,000.
Car prices have been on the rise for the better part of a decade but reached a fever pitch between 2021 and 2022 when Covid-related production stoppages and a global shortage of computer chips led to an unprecedented inventory crunch.
With far more shoppers than cars on their lots, many dealers took advantage of the shortage by jacking prices up over MSRP. While this temporarily bumped dealer profits, industry analysts at the time warned that an affordability crisis was around the corner.
Not all dealers participated in this price-hiking behavior, but nearly all of them are likely feeling the effects.
Remaining disciplined on prices and avoiding the enticing short-term gains and eye-popping profit margins was important to dealers like Adam Lee, who wanted to maintain the trust of his customers and keep shoppers in the pipeline for years to come.
Vehicle prices are finally cooling off a bit
Now, four years later, Lee and his managers at Lee Auto Mall in Maine are spending time trying to help customers overcome negative equity, sometimes sacrificing profits in the process.
"We're doing the best we can now, if someone comes in with a decent trade, to give them as much money as we can," said Lee. But sometimes the math just doesn't add up.
"We can decide that it will take too much money to get someone out of a car," he said. In that case, the customer leaves the lot without a car and Lee loses a potential sale.
Lee was among the dealers who warned about the long-term consequences of recent price hikes. Auto industry analysts backed up that caution, warning dealers of an affordability crisis when inventory stabilized and vehicle prices returned to earth.
Vehicle inventory has swung in the other direction, with a majority of dealers holding more than 75-days worth of vehicles on their lots (a 60-day supply is considered healthy).
That's sending prices down, which also lowers trade-in values. This leaves some car owners deeper in the hole.
"Consumers owing a grand or two more than their cars are worth isn't the end of the world, but seeing such a notable share of individuals affected at the $10,000 or even $15,000 level is nothing short of alarming," Jessica Caldwell, head of insights at Edmunds, said. "A combination of uncontrollable market factors and misguided consumer financial decisions are contributing to the rise of this troubling trend."
Tom Santospago, a previous general manager at one of Lee's stores and now an equity partner who oversees the group's operations, said it's not uncommon to have customers who owe $15,000 or more on their car loans.
"It's really sad," Santospago said. "It definitely hurt the customers."
