Falling Underwater on a Car Loan Is Becoming More Common and Expensive Than Ever

• 29.3% of trade-ins toward new-vehicle purchases had negative equity in Q4 2025, the highest share since Q1 2021.
• The average amount owed on underwater trade-ins hit an all-time high of $7,214.
• More than one-quarter of upside-down trade-ins (27%) carried $10,000 or more in negative equity, a record high.
• Typical trade-in behavior is colliding with higher prices and borrowing costs, making negative equity harder to escape once buyers fall in.

Auto debt continues to be a growing challenge for U.S. car buyers, and new data from Edmunds shows the pressure is intensifying. In Q4 2025¹, 29.3% of trade-ins toward new-vehicle purchases were underwater, meaning owners owed more on their vehicle than it was worth at the time of trade-in. That marks the highest share Edmunds has recorded since Q1 2021, when 31.9% of trade-ins were underwater.

But the growing share of underwater trade-ins is only part of the story. The amount of debt buyers are carrying into their next purchase has reached an all-time high. In Q4 2025, the average amount owed on underwater trade-ins climbed to $7,214, the highest level Edmunds has ever recorded.

What's behind the rise in upside-down auto loans?

Trading in vehicles before they're fully paid off isn't a new concept — in fact, it's long been a common part of car ownership in the U.S. What's changed is how expensive that habit has become. 

Many underwater trade-ins today involve loans originated during the pandemic-era chip shortage, when new-vehicle inventory was scarce and incentives were minimal. With fewer discounts available, many buyers paid closer to or above MSRP and often 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. Some of those buyers accustomed to a three-year replacement cycle likely entered ownership without fully accounting for how different the financial dynamics would be. When those owners chose to trade in their vehicle around the three-year mark, they likely found themselves in a far less favorable position than expected, with loan balances that exceeded their vehicle's value. 

As the market has moved beyond the supply shortages of recent years, vehicle prices have normalized and depreciation has returned to more typical patterns. Loans that originated when prices were elevated are now aging into a market where values are no longer inflated, making the gap between what many buyers owe and what their vehicle is worth more apparent. Combined with higher borrowing costs in today's market, that dynamic has left more buyers facing steeper financial trade-offs when it comes time to replace a vehicle — and has made negative equity harder to escape once it takes hold. 

While the increase in the average trade-in age for underwater vehicles has been relatively modest, the data shows a much sharper rise in the amount of negative equity being carried into trade-ins. That divergence points to a growing disconnect between how long consumers are keeping their vehicles and how quickly loan balances are coming down. 

Many buyers who financed vehicles with longer loan terms have returned to the market on a cadence they're accustomed to, only to find that their remaining loan balance is far higher than expected relative to their vehicle's present-day value. Many consumers likely operated under the assumption that by the time they were ready to trade in their current vehicle, they would at least break even on their loan, if not have a small amount of positive equity to roll into their next purchase. But the data suggests that assumption is increasingly no longer holding true. 

As a result, some buyers may respond to this mismatch by extending their next loan rather than addressing the underlying debt. Edmunds data shows that 40.7% of new-vehicle purchases involving negative equity are now financed with 84-month loans, underscoring how longer terms are increasingly being used to manage higher balances. While this approach can lower monthly payments in the short term, it often delays equity recovery and increases the likelihood that negative equity will carry over again in the future.  

Five-figure negative equity is becoming more common

The rise in negative equity is increasingly concentrated at much higher dollar amounts.

In Q4 2025, a record 27% of underwater trade-ins carried five-figure negative equity, or balances of $10,000 or more. Among those owners, 17.4% owed between $10,000 and $15,000, while 9.2% carried balances above $15,000 — both record highs.

For buyers carrying balances at this level, the financial gap to overcome before reaching positive territory is substantial, making it far more difficult to replace a vehicle without carrying over debt and feeling as if they will never get ahead with payments vs. principal. 

The real cost of rolling debt forward

Negative equity doesn't stop at the trade-in. Buyers who roll debt into a new loan typically finance significantly more than those who don't, which can translate into higher monthly payments and longer repayment timelines.

In Q4 2025, 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. These buyers also financed $11,453 more than the typical new-vehicle buyer.

That added burden leaves buyers with less financial flexibility, making it harder to handle unexpected expenses or changes in circumstances. In some cases, carrying negative equity can even limit a buyer's options since lenders may only allow debt to be rolled into vehicles that meet specific loan-to-value requirements. This makes it harder for shoppers to downsize or move into a less expensive vehicle than they may have originally planned.

¹Edmunds data for this analysis focuses specifically on trade-ins toward new-vehicle purchases and excludes used purchases.

Edmunds says

The data highlights how easily negative equity can become a cycle that’s difficult to escape. Rolling debt forward may offer short-term relief, but it often leaves buyers with higher payments,  and fewer options the next time they’re in the market.

Avoiding that cycle generally comes down to fundamentals: understanding how much a vehicle is worth relative to what’s owed, choosing purchases that hold their value and align with long-term needs, and recognizing that focusing only on monthly payments can obscure the true cost of a purchase. As affordability pressures persist, buyers who clearly understand these tradeoffs are better positioned to make sustainable decisions, and dealers who help set those expectations early may benefit from smoother transactions and stronger long-term relationships.

For buyers who are already underwater, the path forward is often less about quick fixes and more about minimizing additional debt. In those cases, understanding available options and timing decisions carefully can help limit how much negative equity carries into the next purchase.