Feb 13, 2026
For years, car buyers have watched prices skyrocket and loan terms lengthen. Now, new data shows just how many drivers are feeling the squeeze.
In the fourth quarter of 2025, 29.3% of trade-ins toward new car purchases were underwater, meaning drivers owed more on their auto loans than their cars were worth, according to Edmunds. That’s the highest percentage since early 2021, when pandemic-era shortages drove up prices across the market (1).
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Even more striking: the average negative equity balance climbed to $7,214, an all-time high. More than one in four underwater trade-ins carried negative equity of $10,000 or more; also a record.
Taken together, these numbers point to a growing financial trap for drivers who rely on trade-ins to keep upgrading their vehicles. And that negative equity trap can also have long-term consequences that many consumers might not be aware of.
Underwater trade-ins impact your finances
Many of today's underwater loans trace back to pandemic-era purchases when chip shortages limited supply, pushing up the cost of both new and used cars, CNBC reports. Buyers often stretched loan terms to keep monthly payments manageable, which lowered their upfront costs but slowed their equity buildup (2).
Vehicle depreciation is doing the rest of the damage. Drivers who’ve been making payments for years can still end up underwater if they locked in high interest rates, chose 70+ month loans, or bought models with lower resale values.
At the same time, monthly auto costs keep climbing. According to Experian data from September 2025, the average car payment rose 9% over two years to $687, while average lease payments jumped 11% to $660. Higher balances plus higher rates leave little room for error (3).
Being underwater isn't the end of the world if you plan to keep your car for a while. Over time, depreciation rates slow, your loan balance falls as you make payments and equity can recover.
Think about the difference in value between a 2026 and a 2024 model of the same car versus a 1999 and a 1998 model. Newer cars can lose thousands in value in a short period, while older vehicles tend to depreciate much more gradually.
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But when drivers decide to trade in after just a few years and have negative equity, the problem can start to snowball. When trading in an underwater loan, you generally have two options: pay off the remaining balance or roll it into your new loan. Many buyers choose to roll over — and that is where the cycle begins.
According to Edmunds, buyers with negative equity financed $11,453 more on average than other new-car buyers. Their monthly payments averaged $916, compared with the industry average of $772. Nearly 41% of those loans stretched to 84 months, keeping borrowers underwater even longer (1).
Those extra costs don't just impact your car budget. It can make it harder to save and pay off debts. It might even push out big decisions like buying a home, starting a business or having kids.
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Should you wait to buy? Here are your options
In most cases, drivers with negative equity are better off waiting before buying another car. That’s because depreciation rates are the highest in the early years, and then slow over time.
Waiting also gives your loan balance time to fall. As you keep making payments, you may eventually reach a point where what you owe matches what the car is worth. If you are set on buying again, here are a few ways to help break the cycle of negative equity:
Pay extra each month
Even an extra $100 towards your car loan can shorten the loan term and reduce interest costs — just make sure the extra money is applied to the loan principal, not future payments.
Avoid rolling debt into a new loan
Rolling negative equity into a new purchase can spike monthly payments and lock you into another underwater loan. If you can’t cover the difference upfront, consider waiting.
Sell instead of trading in
Private sales often land higher prices than dealer trade-ins. If you’re only slightly underwater, selling the car and paying off the remaining balance could free you up to buy a more affordable car — and get out of the negative equity trap.
Shop around when you trade in
Different dealerships might offer different trade-in amounts, and timing matters. Seasonal promotions or end-of-year sales can sometimes narrow the equity gap.
Negative equity isn't just a short-term problem — it can quietly drain your finances for many years. When buying a car, try to stick to the 20/4/10 rule: aim to put 20% down, take a 4-year loan and keep total vehicle costs under 10% of your monthly income. Focusing on the full picture, not just the monthly payment, can help you stay on budget and avoid negative equity.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Edmunds (1); CNBC (2); Experian (3).
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Danielle is a personal finance writer whose work has appeared in publications including Motley Fool and Business Insider. She believes financial literacy key to helping people build a life they love. She’s especially passionate about helping families and kids learn smart money habits early.
