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>So many people will be underwater on their car loans.

Can you clarify what you mean? A car is a rapidly depreciating asset; being underwater is the norm. It's only been during the pandemic that used vehicle prices have outstripped loan values.

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A lot of folks bought used cars at ridiculously high prices (over original MSRP when sold new in some cases). Banks approved them for those loans, and when the market corrects and used values come back in line (ie stop appreciating and depreciate again) those folks will be in severe negative equity positions.

People who bought a used car because they needed something now and couldn't get new (ie totaled their old car), they were probably planning on trading that car in for something new ASAP. People who buy new cars tend to trade them in every 3 years, so driving a 3 year old car is not normal. While a new car will be underwater for a time, normally by the time 3 years have passed it is worth about what you owe and so trading in isn't a loss.

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