Millions of drivers now owe more on their cars than they are worth. This big problem has hit a four-year high. About 7.1 million car loans are “underwater” right now. This means many car owners face serious financial stress.
You might be one of them. People owe an average of $5,800 more than their car’s value. This trend shows a clear sign of financial trouble for many households. It can make buying a new car or trading yours in very difficult.
Millions Trapped: What “Underwater” Means for Your Car Loan
An “underwater loan” is simple to understand. It means you owe the bank more money than your car is worth. Imagine your car is valued at $20,000. But you still have $25,000 left to pay on your loan. You are $5,000 underwater. This situation is also called negative equity. You can learn more about what an underwater loan means.
Many things cause this problem. Car values are falling quickly right now. Interest rates are also high. This makes loans more expensive over time. Many people bought cars when prices were very high. They took out long loans with low rates then. Now, things have changed.
Why This Is Happening Now
Used car values dropped a lot. They fell 5.4% in April alone. This quick drop makes loans go underwater faster. Overall, used car prices are down 13% from early 2022. This hits people hard who bought cars during the pandemic. Car supply was low then. So, prices were much higher.
Longer loan terms also play a big part. Many people choose loans for 72 months or even longer. This keeps monthly payments lower. However, it means you pay more interest. It also keeps you in debt longer. Your car loses value faster than you pay off the loan.
High interest rates make it worse. They make it hard to refinance an existing loan. So, you are stuck with your current high payment. The average new car loan payment is now over $700 a month. Used car loan payments are around $530 a month. These high costs add pressure to family budgets.
Some borrowers are hit harder than others. People with lower credit scores often get higher interest rates. This makes their loans bigger. They also tend to buy older used cars. These cars often lose value even faster. This creates a bigger risk of going underwater. It is always smart to understand auto loan terms well.
This problem affects the whole economy. Banks might see more people unable to pay. It signals broader money worries for many families. This trend is a clear warning sign.
