It’s a tough time to be a car owner in the US.

Prices for new vehicles are high. Interest rate hikes have made loans more expensive. And many car owners now owe more on their loans than their vehicle is worth. This situation — commonly called being “underwater” or having “negative equity” — occurs when the price of a car falls faster than the owner can pay down the loan for it.

In November, people with negative equity were underwater by an average of $6,054, the most since April 2020 and well above pre-pandemic averages, according to automotive information firm Inc. It’s a precarious spot for many Americans, coming after a twin surge in car buying and interest rates has strained finances and fueled an uptick in automobile repossessions.

“We're in this situation where combined with the cost of the vehicles being so high and the interest rates being so historically high, you have a lot of people who are in bad car loans,” said Joseph Yoon, consumer insights analyst for Edmunds.

New cars lose value as soon as they’re driven off the lot, so being underwater is not uncommon. Still, the recent surge in negative equity is a troubling sign in a US economy that has mostly proved resilient in the face of inflation-taming rate hikes.  Repossessions have ticked higher, with car owners falling behind on their payments at the highest rate in three decades.  And as the Federal Reserve ponders when to start cutting rates, stress in the car market is a window into the financial struggles of everyday Americans who are having a hard time making ends meet.

The last time the average negative equity was this high — $6,078 in April 2020 — Americans were rushing to trade in their vehicles after the Fed cut rates in response to the start of the pandemic. At the time, car owners with high payments recognized they could either refinance or switch out their car for another at a lower rate, even if that meant rolling over some negative equity. In 2019, the average negative equity hovered around $5,300.

Several factors combined to create the current situation. The average rate for a loan on a new car is 7.4% and 11.6% for a used vehicle. Plus, in recent years, dealerships and lenders have started offering six- and seven-year loan terms, as well as lower down payments, which make it harder for owners to build equity in their vehicle.

Then there’s the strange dynamics in the used car market. During the pandemic, the value of used vehicles soared, thanks to supply chain issues and increased demand as Americans spent stimulus checks. But since a peak in early 2022, used-car values have fallen more than 20%, according to the Manheim Used Vehicle Value Index. That has left many Americans with a rapidly depreciating asset on their hands.

It’s a big challenge for owners looking to trade in their vehicle for a new one, since they would still be on the hook for the remainder of the loan balance. Plus, your insurance provider will typically only pay out the current market value of the car if you get in an accident and the car is totaled. If that amount isn’t enough to pay back the loan, you’ll have to come up with the rest yourself.  

It’s particularly tough for people who are realizing they took out a larger car loan than they can afford. For instance, say someone borrowed $20,000 on their car and can’t keep up with the payments. They might try to trade in the car, only to find that the vehicle is worth only $18,000 now, and they still owe $19,000 on the loan. That means they have to come up with the $1,000 to repay their lender.

This is the case for Sandra Rivas, who’s about $5,000 underwater on the loan for her 2018 Toyota Camry Hybrid. The 38 year old, who works for a bank in San Antonio, rolled over about $4,500 in negative equity when she exchanged her prior car for the hybrid in September 2022.

Now, after going through a divorce and selling the equity she had in a home she shared, she’s reevaluating her finances. She’s tired of the $648 monthly payments on the car loan, which carries a 14% interest rate, and wants to trade it in. Still, she doesn’t want to “pay someone to buy my car.”

“It’s a little ridiculous when you sit back and look at the numbers,” she said. “It’s like how much am I paying you? And how has my loan amount not gone down?” 

This article was provided by Bloomberg News.