Car payments have hit a breaking point. According to Edmunds, 17% of drivers now pay more than $1,000 a month. That’s one in six car owners. It’s a steep jump from car buying just a few years ago, and it’s leaving many struggling to keep up.

The spiral of higher car payments and negative equity

Auto loan payments have soared, driven by sky-high car prices and interest rates. Moody’s Analytics reports that as of May 2024, the average car payment sits at $760 a month—up 40% from just five years ago. “The idea you’re going to pay $700, $800 a month for the next six years, I mean, it just sounds crazy for a depreciating asset,” said Charlie Chesbrough, a senior economist at Cox Automotive.

For many, the trouble starts when trading in a car. During the pandemic, drivers paid inflated prices for vehicles. As the used car market corrected, many found themselves “underwater” on their loans—owing more than their cars are worth. In the first quarter of 2024, 23% of trade-ins had negative equity averaging over $6,167, according to Edmunds.

That debt doesn’t disappear. Instead, it gets rolled into the next loan, increasing monthly car payments. Ivan Drury from Edmunds warns, “You’re paying off a car from like 10 or 15 years ago. You’ve never actually paid off a vehicle.”

Record car payment defaults

The result? A surge in late car payments. By the end of 2024, 7.7% of auto loans were 30 days overdue—the highest since the 2010 recession, according to the New York Federal Reserve. And 6.1% of subprime borrowers were more than 60 days late, the worst rate since 1994, Fitch Ratings reports.

Jonathan Smoke, chief economist for Cox Automotive, explains the challenge: “In the last 20 years, we have not seen more people falling behind on their auto loan payment compared to what we see now.”

Some relief on the horizon

For drivers looking to buy in 2025, there’s good car payment news. Experts predict that auto loan interest rates will ease as the Federal Reserve continues to lower short-term rates. Bankrate’s Greg McBride expects five-year new car loans to average 7.0% by late 2025, while four-year used car loans should drop to 7.75%.

Better car payment deals could also come from increased competition among lenders. McBride says, “Your biggest savings may not come from the interest rate perspective.” Instead, look for manufacturer incentives, discounts, and choosing a lower-priced vehicle to save even more.

While today’s car payment defaults are hitting record highs, better options may be just around the corner for those ready to shop smart. See one expert’s opinion on why car prices may even come down in 2025 in the video below: