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As consumers contend with higher auto payments, new data from car website Edmunds suggests they may be falling into a cycle of negative equity — where their outstanding auto loan balances are higher than the value of their cars.
In the fourth quarter of 2025, 29.3% of trade-ins toward new car purchases were “underwater,” or had negative equity, according to Edmunds. That is the highest share since the first quarter of 2021, when 31.9% of trade-ins had negative equity, according to the data.
The average amount owed on trade-ins with negative equity rose to $7,214 — an all-time high, according to Edmunds. More than one-quarter of trade-ins had more than $10,000 in negative equity — also a record high.
Drivers trading in a car with negative equity typically need to come up with cash to pay that balance, or roll the debt into their new loan.
Other recent Edmunds data shows more drivers are taking on $1,000-plus monthly auto loan payments for both new and used cars.
How drivers end up underwater on car loans
Experts say cars that are underwater trade-ins today were likely purchased when pandemic-era chip shortages made it more likely that consumers were paying above the manufacturer’s suggested retail price, or MSRP. Meanwhile, a shortage of lease options at that time may have prompted consumers to purchase new cars instead, and face high loan balances if they opt to trade them in.
Today’s car buyers are more likely to get deals closer to MSRP.
“There’s some hope in the sense that people are going to get better deals going forward for 2026 on their new car purchase,” said Ivan Drury, director of insights at Edmunds.
“But the problem is that for the vehicle in their driveway, a lot of vehicles are losing value,” Drury said.
Consumers may otherwise end up underwater on their car loans — even if they have been making payments for years — for a variety of reasons, according to Drury. Those can include getting a higher annual percentage rate on a loan, opting for a longer loan term length or buying a vehicle with a bad resale value.
Having negative equity in a car is not only expensive, but it can also become a cycle that’s difficult to break.
Buyers with negative equity financed $11,453 more on average than other new vehicle buyers, according to Edmunds’ data.
Buyers who rolled negative equity in their new loans had an average monthly payment of $916 in the fourth quarter — a record high — versus the $772 average industry monthly payment, according to Edmunds.
To lower those monthly payments, car buyers with negative equity may opt to stretch the length of their loans. About 40.7% of new car purchases with negative equity were financed with 84-month loans, Edmunds’ data shows. But doing so continues the risk of being underwater, since early payments mostly cover interest, and you aren’t making much headway on the principal.
What to do if you have negative equity in your car
If you are underwater on your car loan, you first want to try to keep your car for longer, if possible, said Bruce McClary, senior vice president at the National Foundation for Credit Counseling.
Even if you start out owing more on the car than it’s worth, after years of payments, depreciation on your car will slow and you may be able to reach a point where your loan balance drops below the vehicle’s value, McClary said.
It also helps to pay more than the minimum monthly payment or to make extra payments if you can, though not everyone may be able to do that, he said.
If you do trade in your current car for a new one, try to avoid a rollover offer, where the unpaid balance on your old car goes into the new car loan, McClary said — it can spike your new monthly payment.
“That just cuts further into the amount of available money that you have in your budget each month,” he said.
Instead, try to sell your old car on your own rather than trading it in at the dealer, McClary said. Often, you can get more for your car through a private sale, which can help you pay off more of your loan, he said.
Be sure to consider all of your options when selling your car, Drury said, as one dealership that needs the vehicle may offer to pay more.
“Shop it around,” Drury said — especially if it’s just a smaller difference, like $1,500, between positive and negative equity on your trade-in.
If you have negative equity, your car dealer may suggest you purchase guaranteed asset protection, or GAP, insurance to cover the difference between your total auto loan and your car’s value. If you do decide to purchase GAP insurance, shop around for the best rates, McClary said.
Oftentimes, you can purchase GAP insurance through your existing auto insurance provider at a “significantly more affordable” price than if you went through an auto dealer, according to McClary.
Buyers’ financing options may be limited — or possibly even denied by a bank altogether — based on their loan-to-value ratio between the car they currently have and the one they aspire to buy, Drury said.
As the vehicles traded in with negative equity are trending older, it may be time to rethink your ownership cycle, particularly if you’re signing up for longer loans each time, he said.
If you’ve made it a habit of trading your car when your equity is negative and it’s your second or third time doing so, you may want to consider leasing instead, Drury said.
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