Decoding the True Cost of Buying a New Vehicle: What Every Buyer and Investor Should Know About Market Trends and Financial Impact
The Rising Tide of Underwater Auto Loans: What Investors and Advisors Must Know Now
A growing number of drivers across the U.S. are facing a financial squeeze with their auto loans underwater—owing more on their vehicles than the cars are actually worth. According to the latest data from Edmunds, a trusted auto industry insights provider, a staggering 26.6% of trade-ins toward new car purchases in Q2 2025 were underwater. This marks the highest level in four years, just shy of the 31.9% peak seen in early 2021. The average negative equity on these loans remains a hefty $6,754, underscoring a significant financial burden for many consumers.
Why should this matter to investors and financial advisors? Because this trend signals deeper shifts in consumer credit health, auto financing practices, and the broader economic environment that can ripple into markets and portfolios.
What’s Driving This Surge in Underwater Loans?
Several factors contribute to this growing underwater phenomenon:
- Longer Loan Terms: The rise of 84-month loans—now accounting for 21.6% of new auto loans—has ballooned the total amount financed, even as car values depreciate rapidly. While longer terms lower monthly payments, they increase the risk of negative equity.
- Smaller Down Payments: Many buyers are opting for minimal upfront cash, which means they start with little equity.
- Rapid Depreciation: Cars lose value the moment they leave the lot, a fact that’s exacerbated by supply chain issues and inflationary pressures pushing prices higher.
- Rolling Over Debt: Consumers often roll negative equity from previous loans into new ones, compounding the underwater problem.
The Investor Angle: Why You Should Care
Auto loans are a significant component of consumer credit, which directly impacts consumer spending—a key driver of economic growth. According to the New York Fed, auto loan balances hit a record $1.5 trillion in early 2025, with delinquency rates creeping up. Rising underwater loans could lead to higher default rates, pressuring credit markets and potentially signaling broader economic stress.
For financial advisors, understanding this trend is crucial when advising clients on consumer debt management, credit health, and even portfolio allocations in auto-related sectors.
Actionable Insights for Investors and Advisors
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Reassess Exposure to Auto Finance and Related Sectors: With rising underwater loans, auto lenders and subprime loan portfolios may face increased risks. Investors should scrutinize balance sheets and default projections of companies in these sectors.
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Advise Clients on Smart Auto Financing: Encourage clients to avoid excessively long loan terms and to make larger down payments when possible. Highlight the value of gap insurance to protect against total loss scenarios—an often overlooked safeguard that can save thousands.
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Monitor Consumer Credit Trends: Keep an eye on broader credit indicators like auto loan delinquency rates and credit score trends. These can be leading signals for shifts in consumer spending and economic health.
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Consider Alternative Mobility Investments: As traditional car ownership becomes more financially complex, opportunities in ride-sharing, electric vehicle leasing, and subscription models may grow. Investors should explore these emerging trends.
What’s Next?
We anticipate continued pressure on auto loan markets through 2025, especially if interest rates remain elevated and vehicle prices stay high. The shift toward longer loan terms may persist, but with increasing risk. Financial advisors should proactively counsel clients on managing auto debt and credit health to avoid being trapped underwater.
A recent survey by TransUnion found that 1 in 4 borrowers with auto loans were underwater in mid-2025, reinforcing the widespread nature of this challenge. This underscores the need for strategic financial planning around auto purchases.
Unique Perspective: The Ripple Effect on Used Car Markets
One under-discussed consequence is the impact on the used car market. With many owners unable or unwilling to trade in underwater vehicles, used car inventory tightens, pushing prices even higher. This creates a feedback loop where new car buyers face higher prices and more underwater loans. For investors, this dynamic could influence valuations in used car dealerships and online marketplaces like Carvana and Vroom.
Bottom Line: The underwater auto loan trend is more than just a consumer finance issue—it’s a barometer of economic resilience and credit market health. Investors and advisors who stay ahead of these developments, leverage data-driven insights, and guide clients toward prudent auto financing decisions will be best positioned to navigate the challenges and opportunities ahead.
For those looking to deepen their understanding, sources like Edmunds, the New York Federal Reserve, and TransUnion provide invaluable data to track this evolving landscape.
If you’re advising clients or managing portfolios exposed to consumer credit, now is the time to sharpen your focus on auto loan trends. The underwater tide is rising—don’t get caught beneath it.
Source: What that means when buying a new vehicle
