If you’ve been thinking about trading in your car lately, you might want to sit down first. The latest numbers from Edmunds paint a troubling picture for American drivers, with nearly 30% of new vehicle trade-ins carrying negative equity at the end of 2025. That means the car sitting in your driveway could be worth thousands less than what you still owe on it. And the problem is getting worse, fast.
- In the fourth quarter of 2025, 29.3% of trade-ins toward new car purchases had negative equity, and the average amount owed on those upside-down trade-ins rose to $7,214, an all-time high.
- About 40.7% of new vehicle purchases involving negative equity are now financed with 84-month loans, as buyers stretch their terms to manage ballooning balances.
- The average monthly payment for buyers who rolled negative equity into a new loan reached $916, a record high and $144 more than the overall industry average of $772.
How the Pandemic Created a Ticking Time Bomb
This mess has roots that trace directly back to the pandemic years. Many underwater trade-ins today involve loans that started during the pandemic-era chip shortage, when new vehicle inventory was scarce and incentives were minimal. Buyers paid closer to or above MSRP, and they had less flexibility to choose lower-priced models or trims. At the same time, leasing options were limited, pushing some consumers who might have preferred to lease into purchases instead.
Now, the bill has come due. As the market has moved past those supply shortages, vehicle prices have come back down and depreciation has returned to more typical patterns. Loans that started when prices were inflated are now aging into a market where values aren’t pumped up anymore, making the gap between what buyers owe and what their vehicle is worth painfully obvious.
Used vehicle prices were roughly 15% lower in August 2025 than in early 2022, based on federal data for urban consumers. For buyers who took out car loans during the pandemic years, those trend lines aren’t good news.
The Debt Snowball Keeps Rolling
What makes this situation especially tricky is how it feeds on itself. 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. Most choose to roll it over, and that’s where things spiral.
Buyers who rolled negative equity into a new loan had an average monthly payment of $916 and financed $11,453 more than the typical new vehicle buyer. That added burden puts real strain on household budgets.
And the five-figure territory is growing fast. In Q4 2025, a record 27% of underwater trade-ins carried $10,000 or more in negative equity. Among those owners, 17.4% owed between $10,000 and $15,000, while 9.2% carried balances above $15,000. Both figures are all-time records.
To cope with higher balances, buyers are stretching their loan terms further and further. About 40.7% of new car purchases with negative equity were financed with 84-month loans. 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. For buyers looking at alternatives like a Lease Here Pay Here arrangement, it’s worth understanding that any financing path carries trade-offs depending on your credit situation and budget.
Smart Ways to Dig Yourself Out
If you’re underwater right now, the single best move might be the simplest one. Try to keep your car for longer if possible. 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 reach a point where your loan balance drops below the vehicle’s value.
It also helps to pay more than the minimum monthly payment or to make extra payments if you can. Even rounding up your payment by $50 or $100 a month chips away at the principal faster than you’d expect.
Interest rates are moderating, and Edmunds is seeing an uptick in customers seeking to refinance car loans at lower rates. Refinancing may be especially attractive to consumers who have better credit now than when they took out the original loan.
Another tip worth considering: try to sell your old car on your own rather than trading it in at the dealer. Often, you can get more for your car through a private sale, which can help you pay off more of your loan.
And if you absolutely must buy another car while you’re underwater, try to get pre-approved for auto loans across several banks or lenders. This helps you get a better gauge of the terms you can qualify for and pick out the best offers. Once you’re ready to buy, the auto dealer might try to match the deals you have or offer better financing options.
Breaking the Cycle Before It Breaks Your Budget
The numbers are clear: negative equity is becoming a bigger financial burden for American drivers every quarter. The average trade-in with negative equity is only 3.7 years old, and many of those drivers could have erased their losses by waiting another year or two and paying off some or all of the remaining loan balance.
Before you head to a dealership, take ten minutes to look up your current vehicle’s value on sites like Edmunds or Kelley Blue Book. Compare that number to your remaining loan balance. If there’s a gap, you’ll want a plan before signing anything new. Patience and a little extra payment each month can save you thousands in the long run.
