Solutions Economic and Market Watch

Hello, and welcome to the Economic & Market Watch podcast for the week of August 25, 2025. This is John Suter of CSC.

Just like many flavors of upside-down cakes (pineapple being the most popular, I think), many car owners today, driving all sorts of different makes and models, are burdened with upside-down car loans and high payments. This is painful. Americans love their automobiles for a variety of different reasons, but today many are car poor. Auto-loan debt is second only to house-mortgage debt here in the United States — and the current trend does not look great. Edmunds, a car-shopping website, reported that an increasing number of consumers with auto loans had negative equity, meaning they owe more on their vehicle than it's worth — a lot more.

The data showed that 26.6% of trade-ins applied toward a new vehicle purchase had negative equity, a four year high. The average amount of these upside-down loans was $6,754 in the second quarter of the year according to Edmunds — up from $6,255 in the same quarter a year ago. Even more alarming is that 23.4% of these drivers owed more than $10,000 and 7.7% owed more than $15,000. That's not too surprising, given the average new car price in America is up to $49,962.

The story behind these numbers is that borrowers who lack the cash to pay off their previous car loan often roll that negative equity into the new one — and that's where the financial burden starts to escalate. With a growing share of upside-down owners thousands of dollars in the red, many are at the risk of getting stuck in a cycle of debt that only grows harder to break over time. For example, the average monthly payment for borrowers who rolled negative equity into their new loan was $915 in the second quarter — a record high, based on Edmond's analysis.

Why is this a growing issue now for automobile owners? For one, this trend started in 2021 with the pandemic-related shortages, which drove up auto prices. Many buyers felt that they had no choice but to pay more than the manufacturer's suggested retail price.

Most American workers need a car to get to work. Many don't have the ability to use public transportation. Another reason is that owners are opting for longer loans, putting less money down or trading in their vehicles earlier than is financially sound. Of course, there are other factors that car owners don't take into consideration when they fall in love with the car they've always wanted. And, let's face it, the smell of a brand new car is awfully appealing.

A potential car buyer doesn't think about the financial hardship if the unexpected happens. Let's take a hypothetical example of a young couple — steady jobs, they have two cars — they need two cars because they are both working. Two decent incomes coming in, both car loans being paid on a timely basis and then wham, one loses their job due to cutbacks. It may be an extreme example, but certainly not far fetched. Now what do you do?

This couple does not need two cars. The options are limited if you don't have the cash to pay off the underwater loan. It doesn't really make sense to continue to make car payments on an underwater loan for a car that you don't really need. Refinancing is likely not an option if your credit score is low. Worse yet, the couple could let their lender repossess the car, which would eventually be sold at auction, but the couple would still be on the hook for their remaining loan balance not covered by the sale, plus costs associated with repossession.

Furthermore, allowing a car to be repossessed is not great for one's credit history, which will be used against you the next time you want to borrow money. For instance, based on the latest figures from Experian, the average new-car loan interest rate for a borrower with excellent credit was 5.18% for the first quarter of this year, but that average jumps to 15.81% for borrowers with a poor credit history. While car ownership is a necessary evil for many of us, there are some decent rules of thumb to keep the buying experience within reason. First off, time is often not on your side, not if you are lengthening your car loan. In this market, to ease the financial sting of steep vehicle prices and high auto loan interest rates, car buyers are extending their car terms to seven years or longer.

In fact, there is data to back this up. In the second quarter of this year, loans stretching eighty four months reached a record high, making up 22.4% of new-vehicle financing, up from 17.6% a year ago.

It's best to avoid doing this, and to be honest, if you need to take out a seven year auto loan, you probably can't afford the vehicle to begin with. If you're worried about this, the first place to start is to use an online car affordability calculator. I tried out Edmunds, which I found to be very useful.

This can be incredibly helpful in guiding your car buying expectations. A tool such as this allows you to first input all the key components that affect affordability a monthly loan payment amount that you can afford, the term of the desired loan, and a current market auto interest rate. You are going to need this information anyhow, but at home, you don't have a car salesperson putting pressure on you. You might have additional equity put down upfront, or a trade-in to lessen the financing amount, but this is a great place to start in determining the price range for a car that meets your budget. The other thing is to leave yourself a little breathing room for unexpected expenses, so don't run the car loan amount up to the very edge of affordability. The goal is to purchase a car that meets your budget needs and allows you to maintain your sanity during uncertain times.

Every potential car buying situation is different, so there's no easy answer, but the worst thing one can do is allow excitement to overrule financial viability. And car salespeople are paid to sell cars. That's their job, to do everything they can so that you drive off the dealership lot in a car that you have always wanted. That can really cause problems and snowball very quickly if you stretch your budget too thin, and then have the WHAM! event blindside you.

What if you can't afford that new car? Car and Driver Magazine often suggests Ozium air sanitizer to make your car smell brand new, even if it isn't. It's probably the cheapest and easiest advice I can give you on this podcast.

That's it for today.

As always, we thank you for listening, and be sure to download the Economic & Market Watch dashboard and intelligence brief. We'll talk to you soon.

So John, if you were trying out car affordability calculators, does that mean you're finally going to replace your car?

Are you kidding me? It's a 1998. That's practically brand new.