Underwater Car Loans and Cheap Used EVs Are Changing How Americans Buy Cars
The hangover from the COVID-era car buying is now hitting in full force. Roughly 30% of Americans trading in vehicles in Q1 2026 were underwater on their loans, owing an average of $7.2K more than their cars were worth. The crisis traces back to pandemic-era pricing, when semiconductor shortages drove vehicle costs sharply higher, and buyers paid whatever dealers asked.
Stuck in reverse: One Mercedes-Benz dealership owner saw a customer try to trade in a Ford F-150 Lightning while still owing $87K on a truck he valued at just $47K. That $40K shortfall highlights how widespread negative equity has become, stretching loan terms and leaving dealers with trade-ins that won’t move at breakeven prices. Research from the Consumer Financial Protection Bureau shows borrowers who roll debt into new loans are twice as likely to face repossession within two years, while Cox Automotive data shows defaults at their highest since 2010 in March.
- Average new-car buyers with negative equity financed nearly $56K in Q1 2026 — about $12K more than typical buyers — pushing monthly payments to a record $932.
- Over 42% of underwater borrowers chose 84-month loans in early 2026, stretching payments past eight years as old debt rolled into new cars.
EV Glut Meets Opportunity
While traditional car buyers struggle with underwater loans, the electric vehicle market is facing its own reckoning — one that could actually benefit buyers. Leases on roughly 300K two- and three-year-old EVs will expire in 2026, followed by 600K in 2027 and nearly 660K in 2028, sending a wave of used inventory onto dealer lots. These vehicles are returning at just 45% of their original value, well below the expected 60%, as tax credits faded and new EV demand slowed.
- Castle Volkswagen is offering a formerly leased ID.4 Pro S with 33K miles for under $23K — less than half its original $52K price in 2023.
- AutoNation lists a 2023 Hyundai Ioniq 5 with 18K miles for $28K — down sharply from its roughly $58K fully loaded price three years ago.
The great reset continues: The drop in used EV values traces back to One Big Beautiful Bill, which ended the $7.5K federal credit in Sep 2025 and helped drive a 27% sales decline in Q1 2026. Yet globally, momentum is moving in the opposite direction, with EVs accounting for 25% of new car sales in 2025 and adoption accelerating across Europe and Asia. The irony is that the US pullback may still boost adoption by making used EVs far more affordable.