A growing number of car buyers have loans worth more than their vehicles — and experts are worried about a surge of delinquencies

• Car sales with a trade-in with negative equity rose from 14.9% to 17.4% in one year.
• Having negative equity means having a car debt that's more than the value of the car itself.

Like a lot of other things in the US, car loans are getting more expensive. So much so, that some drivers have debt on their cars that far exceeds the value of the car itself.

When that happens, the car owner has what's called negative equity, or, in other words, they're upside down on the loan. The number of Americans that are upside down on their car loans is increasing.

Experts at Edmunds estimate that the number of vehicles sales with a trade-in with negative equity — you sell a dealer a used car, and its price gets taken off the new car I'm buying — has increased from 14.9% in 2021 to 17.4% in 2022. Additionally, the amount owed on upside down car loans has increased from an average of $4,141 in 2021 to an average of $ 5,341 in 2022.

For instance, Bloomberg reported that a driver in the Atlanta-area traded in two used cars for a new, bigger one, and walked out of the car dealership with a Ford Explorer valued at $49,000 and $66,000 in debt.

Recent increases in interest rates haven't helped. On average, the annual percentage rate on new vehicles was 6.5% in 2022 and 4.1% in 2021, while for used vehicles it was 10% in 2022 compared to 7.4% in 2021, according to Edmunds.

The combination of rising interest rates and declining used car prices after pandemic-induced highs has left some customers in difficult situations.

As a result, a record number of car buyers are committing to paying $1,000 or more for their car loans, risking missed or late payments.

Severely delinquent loans — those more than 90 days behind payments — also hit their highest rate in more tha a decade in December, according to a Cox Automotive's report.

Despite the high percentage of delinquencies, defaults have not grown as much, for now. The default rate was 2.28% in 2022, up from 1.98% in 2021, but less than the pre-pandemic 2.9% in 2019.

It's worth noting that the increase in delinquencies follows the end of most of the pandemic-related car relief programs, which were set up in 2020 by automakers to allow borrowers to defer loan payments.