Sculpting the Credit CARD Act into a Car Act: How the FTC Should Fight Back Against the Negative Equity Epidemic Debilitating Car Buyers

Blog Post | 113 KY. L. J. ONLINE | April 11, 2025

Sculpting the Credit CARD Act into a Car Act: How the FTC Should Fight Back Against the Negative Equity Epidemic Debilitating Car Buyers

By: John Simms, Staff Editor, Vol. 113 

A car buyer, but specifically one who assumes liability for their first-ever car loan, is generally a satisfied customer. Most first-time borrowers rely on the car loan out of necessity[1]—often a byproduct of being upsold on an unaffordable vehicle[2]—and leave the lot in unexpectedly obtained luxury. This is a common archetype; whether the upsell transitions the customer from used to new, from Work Truck to High Country, or from thousand-dollar beater to “as-is” yet creature-comforted throwaway, it is all the same.[3] Each customer agrees to purchase more vehicle than anticipated and resultantly, likely feels grateful to attain an unforeseen opportunity. Unfortunately, many of these customers, as well as others within their borrowing class, struggle with financial literacy and are blissfully ignorant of the lending condition that often describes the current (and foreseeable) status of their loan: negative.[4] For many of these borrowers, the discovery of “negative equity” and its implications does not occur until financial complications later arise.[5] At that point, they have already made their bed and have no choice but to lie in it. 

Negative equity occurs when the outstanding loan balance exceeds the borrower’s equity.[6] In layman’s terms and in the context of this blog, it generally indicates that a person owes more on their car loan than their car is worth.[7] This circumstance is pervasive,[8] and it is predicated by the fact that a vehicle is a depreciable asset.[9] To illustrate: any customer who finances a car without an equity contribution (e.g., down payment, trade-in, etc.) agrees to instantaneously incur negative equity as their vehicle, now with an additional owner on its vehicle history,[10] is undoubtedly worth less than the total value of their loan, which incorporates both principal and interest owed.[11]

Nonetheless, an initial provision of an equity contribution far from guarantees positive equity across the lifetime of a car loan. Due to the interest payment front-loading standard of loan amortization, many borrowers free-fall deeply negative during the early stages of loan repayment.[12] The miniscule principal contributions within early payments, a result of this standard, dramatically fail to offset the projectile depreciation deteriorating a newly purchased vehicle’s value.[13] 

Meanwhile, several additional circumstances can exacerbate severe negative equity debts.[14] One of the most common is frequent trading.[15] Here, a buyer seeks to trade-in a vehicle, even though this vehicle remains subject to a lien—and in this case, one with negative equity.[16] Consequently, a dealer will “roll” this borrower’s negative equity into a new purchase, adding the negative equity difference of the prior vehicle to the purchase price of the new vehicle. This creates a new loan for the borrower that compounds these values to comprise a principal that far exceeds the vehicle’s purchase price absent the negative equity “roll-up.”[17] Thus, this borrower must restart the process of offsetting the mountain of front-loaded interest payments before repaying a principal value that already far exceeds the car’s purchase price.[18] Resultantly, this borrower multiplies their negativity and can approach (with potential for surpassing) a circumstance where their loan’s outstanding balance doubles the present value of their car.[19] 

Issues arise as borrowers rarely comprehend the gravity of possessing negative equity until faced with its debilitating consequences.[20] Although frequently experienced by borrowers who become handcuffed to undesirable vehicles,[21] one common realization of negative equity’s negative consequences occurs after a car accident.[22] For example, if the aforementioned frequent trader is involved in a car wreck, totaling their new vehicle, they remain liable for their full debt despite now being without a functioning car.[23] Thus, unless this individual wisely invested in GAP insurance,[24] financial devastation ensues, and the borrower faces a debt, equal in value to either the price of one vehicle (if they are insured) or two (if they are uninsured), despite owning no functional vehicles.[25] When this debt obligation is compounded by medical expenses or other fees consequential to an accident,[26] these expenses can be fiscally crucifying.

In a country where over a million vehicles are totaled annually,[27] many Americans face this horror story and suffer unrecoverable adversity as a result. Alternatively, maybe if this borrower had truly understood the consequences of their lending agreement, they could have made a proactive decision to avoid these horrors.

Thus, it is imperative that prospective car borrowers become exposed to the risks of negative equity before agreeing to incur it. Presently, car dealers face no responsibility to inform a prospective borrower that their deal’s terms might lead them into negative equity, regardless of how certain or egregious that possibility appears. Because disclosure prior to agreement is the only way to ensure a borrower knows the prospective consequences of their respective deal, car dealers should be required to disclose negative equity implications when they are foreseeable from a deal’s structure.

This blog recommends disclosure be implemented through a statutory or regulatory scheme sharing similarity to the disclosure requirements of the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act. This 2009 act amended the Truth in Lending Act to require several additional credit card agreement disclosures—warning prospective users of the financial risks and consequences associated with card “payoff timing” and “late payment deadlines and penalties” (among others)—that would showcase interest implications which may otherwise remain unknown to unsuspecting users at the time of agreement.[28] This blog seeks to require similar disclosures within car sale agreements—disclosures that define the phenomenon of negative equity, expose the threatening circumstances triggerable by negative equity,[29] and chart the anticipated amortization schedule, drawing attention to anticipated negative equity values at each payment term interval. Although I do not propose an exact implementation method, one could arise from either a Congressional act or rulemakings from the Consumer Fraud Protection Bureau (CFPB) and the Federal Trade Commission (FTC).[30] Only then can collective exposure to the consequences of car loan negative equity be guaranteed before affected borrowers are forced to lie in the bed they made for themselves—one that is analogous to financial devastation.   

[1] See Jonathan Lanning, CDPS Blog: The Importance of Cars and Car Loans for People with Low and Moderate Incomes, Fed. Rsrv. Bank of Chi. (July 15, 2022), https://www.chicagofed.org/publications/blogs/cdps/2022/importance-cars-and-car-loans.

[2] See generally Patrick H., 5 Proven Upselling Techniques for Auto Sales, AutoRaptor (Dec. 21, 2016), https://www.autoraptor.com/blog/proven-upselling-techniques-auto-sales/ (educating dealers on popular techniques to institute to upsell buyers on out-of-budget vehicles); Adam Hayes, Bait and Switch: Definition, How Strategy Works, and Tips to Avoid, Investopedia, https://www.investopedia.com/terms/b/bait-switch.asp (educating on the “bait and switch” sales strategy generally) (June 2, 2022).

[3] This sentence illustrates three different types of upsells. The first involves two identical vehicles, distinguished by the bait being slightly used and the switch being new. See ASOTU, Turn Used Car Customers into New Car Customers, YouTube (Mar. 25, 2025), https://www.youtube.com/watch?v=SVzob-BmQsQ (depicting Joel Bassam, an automotive group president, discussing the used-to-new switch). The second involves two vehicles of identical make and model, distinguished by the bait being of low trim level and the switch being of high trim level. See generally Larry Printz, 2025 Chevrolet Silverado 1500: Pricing and Which One to Buy, Car and Driver, https://www.caranddriver.com/chevrolet/silverado-1500 (last visited Mar. 30, 2025) (displaying different Chevrolet Silverado trim levels, including “Work Truck” and “High Country,” and their respective price differences, of which, dealers can triangulate for bait and switch tactics). The third involves two different vehicles, and in this hypothetical, a low-budget buyer plans on purchasing a bare-bones, heavily-used yet still functional vehicle for a thousand dollars cash but is persuaded by a salesperson to, instead, use this cash as a down-payment to secure a loan to purchase a more expensive vehicle, often including more creature comforts (such as heated seats, CarPlay, etc.) but sacrificing reliability. See generally Kristine Cain, Converting the Cash Buyer in F&I – It Could Be Easier than You Think, CBTNews (Aug. 20, 2019), https://www.cbtnews.com/converting-the-cash-buyer-in-fi-it-could-be-easier-than-you-think/ (describing the tactic of persuading a cash buyer into borrowing). These vehicles, rich in creature comforts but notoriously unreliable, are commonly referred to as “throwaway” vehicles and are often sold (in this circumstance) in “as-is” condition, indicating that the dealership has not inspected or performed any repairs on the vehicle since acquisition. See Uncle Tony’s Garage, Throwaway Cars and the Transportation Crisis Nobody is Talking About. Technology Run Amok, YouTube (Mar. 24, 2025), https://www.youtube.com/watch?v=KKEkUs8MTnQ; Jim Gorzelany, What to Look for When Buying a Used Car ‘As Is’, CARFAX (June 5, 2020), https://www.carfax.com/buying/buying-used-cars-as-is.

[4] See Morteza Momeni, Competition and Shrouded Attributes in Auto Loan Markets 1, 25 (Sept. 8, 2024) (unpublished working paper) (on file with author), https://mortezamomeni.com/.

[5] See Philip Reed, Is Your Car Loan Upside-Down? How to Handle Negative Equity, NerdWallet https://www.nerdwallet.com/article/loans/auto-loans/car-loans-upside-down (illustrating that the consequences of negative equity often arise in a surprising nature for a borrower) (May 23, 2023).

[6] Kevin Graham, What Is Negative Equity and How Does It Work?, Rocket Mortgage (Jan. 30, 2025), https://www.rocketmortgage.com/learn/negative-equity.

[7] Auto Trade-Ins and Negative Equity: When You Owe More than Your Car Is Worth, Fed. Trade Comm’n Consumer Advice (Sept. 2023), https://consumer.ftc.gov/articles/auto-trade-ins-and-negative-equity-when-you-owe-more-your-car-worth.

[8] Recent data indicated that “39% of drivers with financed vehicles have negative equity.” Justin Fischer, Negative Equity Car Loans Surge: 39% of Drivers Are Underwater, EVs Hit Hardest, CarEdge, https://caredge.com/guides/caredge-black-book-negative-equity-report-q4-2024 (Dec. 19, 2024). Further, also recently, “[t]he average amount owed on upside-down loans climbed to an all-time high of $6,458” in negative equity. Michael Wayland, American Consumers Are Increasingly Underwater on Their Car Loans, CNBC, https://www.cnbc.com/2024/10/15/american-consumers-are-increasingly-underwater-on-their-car-loans.html (Oct. 15, 2024, 1:31 PM).

[9] See Consumer Fin. Prot. Bureau, Negative Equity in Auto Lending 12 (2024), https://files.consumerfinance.gov/f/documents/cfpb_negative-equity-in-auto-lending-report_2024-06.pdf [hereinafter Negative Equity].

[10] Noting that adding an additional owner to a vehicle’s ownership history is generally a depreciable factor for used vehicles, and vehicles “typically lose more than 10% of their value in the first month after you drive off the lot.” Chris Teague, Car Depreciation: How Much Value Does a Car Lose Per Year?, CARFAX (Mar. 17, 2025), https://www.carfax.com/buying/car-depreciation.

[11] See Why Car Leasing Is Better than Buying: Avoiding Negative Equity Risks, FairLease, https://www.fairlease.org/why-lease/avoid-negative-equity-car-loan (exploring “Rapid Vehicle Depreciation” as a cause of negative equity) (last visited Mar. 30, 2025).

[12] Elizabeth Rivelli, How Does Interest Work on a Car Loan?, Car and Driver (Jan. 30, 2023), https://www.caranddriver.com/auto-loans/a42690720/how-does-interest-work-on-car-loan/.

[13] Id.

[14] See Kristina Byas, How to Get Out of an Upside-Down Car Loan, LendingTree, https://www.lendingtree.com/auto/refinance/refinancing-upside-car-loan/ (exploring factors for “[h]ow upside-down car loans can happen”) (Dec. 12, 2024).

[15] The CFPD found that from 2018 to 2022, “11.6 percent of all vehicle loans . . . included negative equity.” Negative Equity, supra note 9, at 2. Further, “in the fourth quarter of 2023, 20 percent of vehicles traded in were in a negative equity position.” Id. at 7.

[16] Id.

[17] Id. at 7, 17.

[18] See Rivelli, supra note 12.

[19] Cf. Warren Clarke, How to Trade in a Car with Negative Equity: 3 Options, Intuit CreditKarma, https://www.creditkarma.com/auto/i/negative-equity-car-trade-in/ (noting three ways to best manage and overcome negative equity, all opposite in application and implicit effect to the hypothetical raised in-text) (Dec. 23, 2021). It also must be noted that borrowers in this class experience “larger loan amounts, larger monthly payments, and higher interest rates” than all other borrowers, leading them to be nearly two times more likely to have their vehicle repossessed within the first two years of their loan than other borrowers. Negative Equity, supra note 9, at 2-3.

[20] See supra note 5 and accompanying text.

[21] Referring to circumstances where a vehicle, subject to a negative equity loan, has unusually diminished value (due to e.g., extreme depreciation, disrepair, the incurrence of bad details within its auto history report, etc.), rendering its borrowing-possessor very few fiscally feasible options for replacing the now-undesirable vehicle. E.g., @arnokdwarf, Should I Repair or Buy a New Car with Negative Equity?, Reddit (July 17, 2024, 12:34:50 AM), https://www.reddit.com/r/askcarsales/comments/1e59e03/should_i_repair_or_buy_a_new_car_with_negative/ (seeking advice for how to best navigate out of a negative equity vehicle that has been plagued with unreliability).   

[22] Reed, supra note 5.

[23] See id.

[24] Guaranteed Asset Protection (GAP) insurance “cover[s] the difference between the amount you owe on your auto loan and the amount the insurance company pays if your car is stolen or totaled.” What Is Guaranteed Asset Protection (GAP) Insurance?, Consumer Fin. Prot. Bureau, https://www.consumerfinance.gov/ask-cfpb/what-is-guaranteed-asset-protection-gap-insurance-en-797/ (Mar. 8, 2024).

[25] See Reed, supra note 5. For added clarity, this sentence refers to the debts one who has amassed such negative equity that the amount owed on their loan potentially doubles the fair market value of their vehicle at the time of sale (e.g., vehicle’s fair market value equals $20,000 but the principal owed on the loan equals $40,000 due to rolled-over debt). Due to an accident, this person is without a functioning car but, if insured (presumably receiving a $20,000 reimbursement for their vehicle’s fair market value and contributing said reimbursement to their outstanding loan), still owes their lender $20,000 (equivalent to the value of their vehicle) or, if uninsured (receiving no accident reimbursement), still owes their lender $40,000 (equivalent to the value of their vehicle x2).

[26] Guide to Calculating Costs, NSC Inj. Facts, https://injuryfacts.nsc.org/all-injuries/costs/guide-to-calculating-costs/data-details/ (last visited Mar. 30, 2025) (discussing the “calculable costs of motor-vehicle crashes,” generalized as “wage and productivity losses, medical expenses, administrative expenses, motor-vehicle damage, and employers’ uninsured costs”).

[27] Recognizing that nearly six-million accidents (involving varying numbers of vehicles per accident) are reported to police annually, wherein 27% of collision claims are deemed total losses. See Warren Clarke, How Many Car Crashes Are There Each Year in the U.S.?, CARFAX (Aug. 8, 2024), https://www.carfax.com/maintenance/number-of-car-crashes-in-the-us.

[28] Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 123 Stat. 1734 (codified as amended in scattered sections of 15 U.S.C.).

[29] “[T]hreatening circumstances” is intended to include all that can traditionally plague those with negative equity, including but not limited to those within this blog, such as frequent trading, car accidents, and vehicles that become undesirable. See Reed, supra note 5.

[30] First acknowledging that Congress wields wide authority to implement a reform of this nature in any method within their constitutional authority, rulemaking could plausibly achieve reform but would likely require thoughtful drafting and some implicit or explicit collaboration. This is because reform would likely regulate both indirect lenders and dealers—the former traditionally regulated by the CFPB, while the latter falls outside the CFPB’s regulatory scope. 12 U.S.C.A. § 5519 (West); see CONSUMER FIN. PROT. BUREAU, CFPB BULL. NO. 2013-02, INDIRECT AUTO LENDING AND COMPLIANCE WITH THE EQUAL CREDIT OPPORTUNITY ACT 1, 1–5 (Mar. 21, 2013), http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf (outlining the authority relationships shared between dealers, indirect lenders, the CFPB, and the FTC). Therefore, because the FTC expressly possesses the authority to regulate car dealers, FTC participation would likely also be required to achieve a regulatory reform. § 5519.