1 in 4 new car trade-ins are now ‘underwater’ — a 4-year high as more owners drag major debt into new buys. Here’s how to avoid drowning in auto loans

This is the highest share Edmunds has reported in four years, meaning a growing number of people are dragging additional debt into a new car purchase, putting them at risk of being underwater on their next purchase. That can create a debt spiral that is difficult to get out of — and the current economic climate can make it even more challenging.

"Affordability pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan, even if those choices may have felt manageable in years past,” said Ivan Drury, Edmunds' director of insights. “And as buyers take on new loans with much higher interest rates than those from just a few years ago, even potential tax deductions can't meaningfully offset the thousands more they'll pay in interest. With a growing share of upside-down owners thousands of dollars in the red, many are at risk of getting stuck in a cycle of debt that only grows harder to break over time.”

What is the impact of being "underwater" on your auto loan

Being "underwater" on your car loan isn't an unusual situation. When you purchase a new car, just driving it off the lot decreases its value — meaning you likely owe more than the car is worth. But a few months of payments will bring the loan balance closer to the vehicle's market value.

But Edmunds is reporting a higher rate of negative equity when buyers go to trade in their vehicle for a new car — meaning months or even years after purchasing a car, buyers are still under water. And not by insignificant amounts. The average amount owed on underwater auto loans in the second quarter was $6,754, Edmunds found. A whopping 32.6% of underwater trade-ins had between $5,000 and $10,000 in negative equity, compared to 30.2% in Q2 2024.

Having negative equity on your car loan can create a rolling mountain of debt. If you trade in, that leftover balance often gets rolled into the next loan — meaning you start out upside down again.

If your car is totaled after an accident, your insurer only pays out the car’s current market value, leaving you responsible for the remaining loan balance. Being underwater also limits your financial flexibility, since you can’t sell or refinance easily without bringing cash to the table.

Here's how to avoid ending up underwater on your car loan

The best way to handle negative equity is to avoid it in the first place. That means being strategic when you finance a car. Here are a few tips to avoid negative auto equity:

• Buy used (even just a year or two old): Cars lose the most value in the first year. Choosing a lightly used vehicle means you let someone else take the depreciation hit while you keep more equity in the car.
• Put down more: A larger down payment immediately reduces how much you owe compared to the car’s value, giving you a buffer against depreciation.
• Aim for shorter loan terms: While 84-month loans (That's a seven-year loan!) can keep payments low, they stretch debt far longer than the car holds its value. A shorter term may cost more monthly, but it helps you build equity faster.
• Don’t buy more car than you need: Flashy upgrades or oversized vehicles may feel tempting, but they can trap you in a bigger loan than your budget or lifestyle requires.

Building equity quickly protects you if you need to sell or trade in before the loan is paid off — or if your car is totaled and the insurance payout doesn’t match what you still owe.

Owe more than your car is worth? Here's your next steps

If you're already underwater on your auto loan, it's clear you aren't alone — but you do need a plan to tackle the debt. Here is how to get started:

• Consider refinancing: If your credit score has improved or interest rates drop, refinancing can lower your payments or shorten your term. That helps you chip away at the balance faster.
• Make extra payments: Even putting an extra $50 or $100 toward your principal each month can help close the gap between what you owe and what the car is worth.
• Trade down instead of up: Instead of rolling debt into a more expensive car, consider trading for a lower-priced or used vehicle. This can lower your loan balance and monthly costs.
• Consider gap insurance: If you’re underwater and your car is totaled, gap insurance covers the difference between your loan balance and the car’s actual value. It won’t fix negative equity now, but it protects you from sinking further.
• Delay your next purchase: Sometimes the best move is simply waiting. The longer you hold onto your current car, the more equity you can build as you pay down the balance.

By being strategic with your loan, down payment, and car choice, you can avoid going underwater and keep your finances firmly in the driver’s seat.

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