2024 is a year of many things in the car world: ten months in, who knew the Tesla Cybertruck wouldn’t be as rare a sighting as some of us thought? Niche EV conversations aside, it’s the general world of vehicle finance that has certain staff at Edmunds arguably uncomfortable. To date, more Americans are underwater on their car loan agreements. What’s more, the average balance they owe is at a record high. Here’s what’s going on.

You can get trapped underwater at any point during a car loan term when the balance owed is higher than its market value. On premature trade, then, “negative equity” may result…and typically gets rolled into a new loan for a different car. In the long term, though, working old negative equity into newer loans commands a consumer to continuously pay for a vehicle they no longer own.

Edmunds recently shared that among all vehicle types, it isn’t luxury or high-end cars where drivers trading in during Q3 found themselves underwater:

Midsize SUVs: 19.5%
Compact SUVs: 17.3%
Large trucks: 10.3%

This month, USA Today interviewed Jessica Caldwell, who’s head of insights at Edmunds. She explained that this has been (partially, at least) a long time coming. During the pandemic’s inventory crunch, many drivers paid higher than MSRP for their cars. Now, a few years into their loans, some want to trade in their vehicles before completely paying them off.

In another lane, more drivers than ever are signing up for high-dollar car payments. This year, a record number of Americans have car payments weighing in at over $1,000 per month. Edmunds says that 17.4% of new-car shoppers from June to September went with a $1,000 or more car payment.

Via yet a third lane, this year, many Americans opt for car loan terms that are as long as possible. For instance, more are going for a 60-month term over a 36-month term to keep their payment low. However, this means the payments chip away less principal at a time.

Combine the high retail prices of the pandemic with the high average payments and lengthy car loan terms in 2024, and many Americans looking to trade in their cars instead find themselves gravely underwater on their car loans.

In fact, 22% of folks looking to trade in their cars in Q3 owed at least a $10,000 car loan balance after market value factored in.

If that doesn’t concern anyone else, know that Caldwell and her colleagues are worried: It’s “nothing short of alarming,” she said.

The percentage of American drivers underwater on their car loans could be an indication of the general public’s financial stability. While debt is traditionally seen as a “good” thing (however right or wrong), “bad debt” is also a player. When a certain number of consumers appear deeply underwater on loans, analysts consider this a risky picture.

Cars are almost never considered an investment. In contrast, they tend to rapidly depreciate once you buy them. When folks look to trade in a financed car prematurely, then, they might be shocked at the car’s low value compared to the loan balance.

Rather than roll over negative equity into a newer loan, it’s best to just keep your current car and pay it off. If you can’t afford the payments, look into refinancing. Some drivers even rent their cars on Turo to help make monthly dues. Be sure your finance company allows this.

To begin with, of course, most drivers should choose a vehicle that serves their financial health…not any intangible motivators. In my mind, a car loan should never be anyone’s financial downfall. I’m not saying there’s anything wrong with a car payment, but there are high-risk situations consumers should avoid entirely.