More Americans are trading in underwater vehicles.  
That does not mean the vehicles are submerged. In a sense, the drivers are. 
More than one in four trade-ins had negative equity in the third quarter of 2025, Edmunds reports. In auto industry parlance, the loans were underwater. 
Of all used vehicles traded in toward a new car purchase between July and September, 28.1% had negative equity. That means the vehicles were worth less than the owner owed on a car loan.   
The figure marks a four-year high.  
Americans with underwater car loans owe a record sum: $6,905, on average, in the third quarter, up from $4,200 in the same period of 2021.  
Among vehicle owners who traded in with negative equity, one in three owed more than $5,000, and roughly one in four owed more than $10,000, Edmunds found. Those figures, too, are record highs. 
The negative equity trend suggests that motorists are willing to take a hit on a trade-in with an underwater loan, rather than wait a year or two and pay down the loan balance. 
“You’ve got people who are going back to the dealership too soon,” said Ivan Drury, director of insights at Edmunds. “We just kind of have an obsession with the newest and greatest.” 
Being underwater on a car loan is a common scenario. Vehicles tend to lose value over time. Anyone paying off a car loan races against the vehicle’s dwindling value, hoping to lower the balance faster than the car depreciates. 
Right now, however, the car loan math is particularly brutal. 
Borrowing costs are relatively high. The average interest rate on a 60-month new car loan was 7.6% in August, up from 4.6% four years earlier, according to federal data.  
Meanwhile, car values are wavering. 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 in the pandemic years, those trend lines do not bode well. 
Negative equity on a car loan may not matter if you plan to hold onto the vehicle until you repay the loan. It becomes a problem if you sell. 
The average trade-in with negative equity is 3.7 years old, Edmunds reports.  
Many of those drivers could have stemmed or erased their losses simply by waiting for another year or two and paying off some or all of the remaining loan balance, Drury said. Auto lenders tend to front-load interest, so the older the loan, the less likely the driver has negative equity. 
Car loans are growing steadily longer, as buyers struggle to keep up with rising car prices. Seven-year loans made up 22.4% of all new vehicle financing in the second quarter of 2025, Edmunds reports, an all-time high.  
Auto buyers typically choose a longer loan term to net lower monthly payments. But a longer loan means you pay more interest over the life of the loan. And it takes longer to build equity. 
“The longer your finance terms are, the less you chip away in the first couple years,” Drury said.  
Rolling negative equity into a new car loan is a costly move. Those buyers wound up with a new car payment of $907, on average, compared to an industry average of $767 in the third quarter, Edmunds reports.  
Trade-in buyers with negative equity financed $11,164 more than the typical new car buyer.  
Motorists with negative equity often wind up buying a more expensive car than they had planned, Drury said.  
Consider: If you have $10,000 in negative equity and you buy a new car for $25,000, financing the entire sum, you borrow $35,000, which is 40% more than the new car is worth.   
Most lenders won’t agree to those terms, Drury said.   
But if you choose a $50,000 car, you are borrowing $60,000, which is 120% of the new car’s value. A lender is more likely to approve. 
“It’s like this vicious cycle,” Drury said. 
Edmunds offers an appraisal tool, which you can use to gauge your vehicle’s value and determine if your loan is underwater.  
If you are underwater, here are some tips on how to resurface. 
The faster you pay down a loan, the sooner you can achieve positive equity. If you can afford it, consider rounding up your monthly payment: say, from $907 to $1,000. 
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, Drury said.  
If your budget allows, you can refinance with a shorter-term loan. That will mean higher payments, but you will pay down the balance more quickly.  
The best way out of an underwater car loan, experts say, might be to do nothing: Keep your car, and keep making payments on the loan. Eventually, your negative equity will melt away.  

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