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More car buyers are finding themselves in a difficult situation financially. According to a recent report from Edmunds, more than 26% of new vehicle trades in the second quarter of 2025 had negative equity — the highest share in more than four years.
Negative equity refers to a situation in which you owe more on your vehicle than it is worth, causing your loan to be “upside down” or “underwater.” Negative equity is a serious problem when you trade in that vehicle for another new vehicle because you have to pay off your balance along with the new loan payments. The average amount owed on these reverse loans was $6,754, underscoring the increased risks of car loans in today’s market.
,consumers “Being underwater on car loans is not a new trend, but in today’s financial landscape the stakes are higher than ever,” said Evan Drury, director of insights at Edmunds. “Affordability pressures, from high vehicle prices to high interest rates, are exacerbating the negative effects of decisions like trading up too early or converting a loan to a new loan.”
In other words, it’s becoming easier than ever to reverse your debt. But you can take steps to avoid the worst of negative equity.
Keep your current vehicle longer
If you’re already skeptical, the easiest way to avoid digging into a deeper financial hole is to maintain your current vehicle and continue making payments. Time and patience are often your best allies. Each payment you make reduces the balance, while depreciation reduces after the first few years on your vehicle. Eventually, the loan balance will become less than the value of the vehicle.
This strategy requires discipline and the ability to resist the temptation to trade in something new. But this will help you avoid spending money you don’t have to. According to Edmunds data, buyers who had negative equity on their current vehicle and rolled it into a new vehicle loan paid an average of $915 per month, compared to the industry average of $756. They also financed $12,145 more than the typical new vehicle buyer.
Holding onto your current car until the balance is in full may not be exciting, but it’s often the safest way to keep your debt from growing.
Refinance or roll the loan into a new car lease
Refinancing can sometimes soften the blow of negative equity. If your credit has improved or interest rates are lower than when you first financed, a new loan can lower your monthly payments and give you time to catch up.
Another option is to lease your next vehicle rather than financing the purchase. You’ll still have to make higher monthly payments than usual because you’ll be paying off the negative equity of your current vehicle along with the lease payments on your new vehicle. At the end of the lease, you will no longer be in reverse, and you will walk away from your vehicle when the lease ends. But there is wear and tear hidden in it. You will not have a vehicle to use as a trade-in for your next purchase. You can either re-lease or finance your next new or used car purchase.
Avoid negative equity in the first place
The best solution is prevention. Edmunds experts say buying a brand-new car often puts you in the depreciation hole as soon as you drive it. A new car typically loses about 20% of its value within the first year, meaning even a modest loan could leave you owing more than the car is worth if you don’t make a large down payment. Solution? Buy used.
Buying a used vehicle helps you avoid the worst depreciation. A 2- or 3-year-old vehicle will still have plenty of life left in it, and should still have warranty coverage. If peace of mind is important, consider purchasing a certified pre-owned vehicle. These vehicles must pass dealership inspection and usually come with extended warranties. This strategy helps reduce the risk of being underwater for a year or two down the road.
Another important step is to make a larger down payment. Edmunds recommends aiming for at least a 20% drop. That cushion will help your loan balance reduce faster than the car’s value, giving you positive equity sooner.
Finally, avoid ultra-long loan terms. It is tempting to extend financing to 72 or 84 months to lower monthly payments. But by doing this you remain lying upside down for a longer time. A loan with a term of 60 months or less, while more expensive monthly, is more financially secure.
edmonds says
Being underwater on a car loan isn’t devastating, but it does require discipline to avoid it. The first step is prevention: shop smart, make solid down payments and avoid too long a loan. If you’re already upside down, your best option is usually to keep the car until you gain equity.
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This story was provided to The Associated Press by the automotive website Edmunds. Josh Jacquot is a contributor at Edmunds.