May 5, 2026
With the average cost of a new vehicle approaching $50,000, car buyers have been searching for ways to keep their monthly payments down.
Unfortunately, one of the most popular hacks — stretching car loan terms to six years or longer to knock a few dollars off of monthly payments — could end up costing drivers thousands of dollars in the long run.
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Here's a look at how this strategy may be a losing proposition, along with some ways to reduce the losses.
31% of vehicle trade-ins carry negative equity
As MarketWatch reports, nearly a third of vehicle trade-ins (31%) now carry negative equity, which means the amount owed on the loan exceeds the vehicle's market value (1). That's a five-year high, as the value of used cars has leveled off from its pandemic-era spike.
The average trade-in that's underwater now comes with $7,183 in negative equity, according to Edmunds (2). Vehicle depreciation is often to blame, but long-term loans and small down payments can also play a part.
According to JD Power, long-term loans accounted for more than half of car sales in March 2026, with 72-month loans representing 40.5% and 84-month loans representing 12.8% (3).
"One of the side effects of this is that equity in the vehicle builds more slowly," Michael Sommer, founder of Alaminos Wealth Planning, shared with MarketWatch (4).
For those who often trade in their cars every three or four years, this slow-building equity can be costly.
"It's just not something you can dig your way out of unless you pay off the entire car," Ivan Drury, director of insights at Edmunds, told MarketWatch when discussing long-term loans.
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It's worse for car buyers who drove away with new wheels in 2022, when pandemic-era supply-chain issues forced them to pay more than the retail price. If they trade in their cars now, many could face a bigger decline in their car's value due to the higher price they paid upfront.
"It's a risk, especially when consumers roll over that amount into the loan for their next car, which makes the negative-equity problem worse by making the new loan larger," MarketWatch reports.
This is a problem that often hits people who are dealing with negative equity in other areas of their life, as well.
According to the the Consumer Financial Protection Bureau, vehicle owners who roll negative equity over into a new car loan often have "lower credit scores, lower household income, longer loan terms and [are] more likely to have a co-borrower than consumers with no trade-in or a positive-equity trade-in."
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How to mitigate negative equity
According to Go Auto, most vehicles lose 50% to 60% of value in just five years and can lose as much as 11% the moment they're driven off of the dealership lot (5).
Thankfully, there are a few things that drivers can do to avoid trading in a vehicle with negative equity. The first two tips involve being proactive when you buy a car.
Short-term loans
If you can afford the monthly payments, opting for a 60-month loan will allow you to pay off the debt in five years, which is right around the time the vehicle will have lost much of its value. This will allow you to trade in the vehicle without negative equity, as your loan has been fully paid.
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It also reduces the amount of interest you buy, since at the beginning of a loan term, most of the money from the monthly payments goes towards the interest and not the principal.
Purchase cars that maintain their value
One great way to mitigate negative equity is to buy cars that generally retain their value. According to Kelley Blue Book, here are the top five cars, trucks and SUVs that have the best resale value in 2026 (6):
- 2026 Toyota Tacoma: 63% after five years
- 2026 Toyota Tundra: 59.9%
- 2026 Toyota 4Runner: 58%
- 2026 Toyota GR Supra: 56%
- 2026 Mercedes-Benz G-Class: 55%
If you already have a car that may be underwater, here are two more tips to mitigate your losses.
Hold on to your vehicle
One sound financial strategy that helps mitigate the high depreciation and interest costs of a long-term loan is to keep the car for longer than half of the loan's term. This means a car owner with a 72-month loan would be wise to keep the car for at least four years, while an owner with an 84-month loan should keep the car for at least five.
This will allow a long-term loan holder to pay off a large chunk of the debt as the vehicle loses value, which could help with limiting negative equity once the owner decides to sell or trade in.
As Tyson Jominy of JD Power explained to MarketWatch, a car owner with $2,000 of negative equity might want to consider holding on to the car for another six months to a year, which might allow the owner to break even on their loan.
Use cash incentives to offset negative equity
Many car companies offer incentives that can help trade-in customers with offsetting negative equity. In fact, certain companies may offer more with their incentives because their vehicles tend to depreciate quicker.
"They structure their incentives to meet their customers where they are," Jominy told MarketWatch.
Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
MarketWatch (1),(4); Edmunds (2); JD Power (3); Go Auto (5); Kelley Blue Book (6)
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Chase is an Associate Editor for Wise Publishing. He formerly worked at Yahoo Canada as an editor on both the News and Sports teams.
