A growing number of consumers are trading in cars and trucks that are worth much less than the amount of money they still owe on their autoloans — and what they owe is shattering records.
Get a new car or truck when you owe nearly $7,000 more than the old one is worth? And it’s only worse if you’re trying to trade in an electric vehicle.
Being upside down, if you will, leaves consumers with far less money to put toward a down payment and puts them at risk of taking on too much debt to finance the next car.
You’re not alone if your car loan is underwater
One in 4 trade-ins associated with a new car or truck purchase in the fourth quarter last year was “underwater” or “upside down,” according to research from Edmunds.
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The data indicated that 24.9% of trade-ins toward new-car purchases had negative equity at the end of last year, up from 20.4% in the fourth quarter of 2023.
It’s not an outlandish number of consumers. In the fourth quarter of 2019, the share of trade-ins with negative equity was 32.7%.
Amount owed on upside-down car loans hits record
The real shocker is that consumers with upside-down car loans owe more money than ever before.
On average, consumers owed $6,838 on upside-down auto loans, which is an all-time high. Worse yet, some 1 in 4 consumers with negative equity owe more than $10,000 on their loans when they’re trading in their car or truck for a new set of wheels.
And 8.5% of vehicle owners with negative equity owed $15,000 or more in the fourth quarter last year.
Make no mistake, many people in these situations are trading in fairly new cars by some standards.
The average age is but 3.3 years for a trade-in when consumers are upside down on their car loan. In the past five years, though, it’s generally been the case that negative-equity situations involve trading in a car that’s slightly less than or a bit more than 3 years old.
Why are borrowers running into trouble?
Many consumers might not realize interest being paid on car loans is typically front loaded, meaning your monthly payment in the first few years of a car loan have the highest amount of interest, according to Ivan Drury, director of insights at Edmunds.
Your monthly car payments in those initial years aren’t doing as much as you might imagine when it comes to bringing down the principal loan balance.
“Unless it’s 0%, then most of the interest is getting paid upfront,” Drury said.
The early payments aren’t helping you build much equity in the car.
For a few years, especially in 2021 and 2022, Drury said, the used car shortage drove up values to amazingly high levels, shielding consumers from negative equity situations.
“Resale values on used cars were so high that you could do no wrong,” Drury said. “You could drive a car for a year, drive back to the dealership and they might even pay you back the same amount that you paid them.”
Supply chain disruptions after the pandemic limited the production of new cars and sent new car prices skyrocketing. As a result, consumers paid shockingly high prices for used cars, too.
And it was amazing how much consumers could get for a trade in if they were trying to unload a vehicle.
Not so much anymore.
A few things are going on here: First, many consumers had to borrow even more money when they paid high prices to buy a new car. Many consumers paid above sticker price to get some trucks and cars back in 2022.
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Second, used car values are trending down once again. New cars are sitting on the lot longer, driving up incentives on new cars and pushing down prices on older vehicles. Some, like Drury, do not expect used car values to plummet in 2025, which would drive more people into a negative equity situation.
Used car and truck prices fell 3.3% for the 12 months through December, based on the most recent consumer price index released by the U.S. Bureau of Labor Statistics. New vehicle prices fell 0.4%.
Over the 12 months through December, the consumer price index rose 2.9%.
Third, consumers didn’t have much breathing room because many didn’t put down significantly more money when they bought a new car or truck in 2021 or 2022. And, Drury said, consumers took out lengthy car loan terms where you often don’t pay down your principal quickly.
“You’re not giving yourself that breathing room,” Drury said.
Sometimes, he said, drivers can need to trade in their car to buy another car or truck much sooner than they had planned.
Maybe, they bought a used car initially that they really didn’t want but that’s what was available on the dealer’s lot during the pandemic.
“There’s a lot of pandemic purchase regrets,” Drury said.
Or maybe, their lifestyle changed. Maybe, they bought a small car but soon ended up getting married, had twins and now need an SUV or a minivan.
If you trade in a new car after two or three years, he said, you’re more likely to end up with an extreme amount of negative equity.
EVs at more risk of being underwater
How do you know if you’re underwater?
You can review your most recent auto loan statement to find the payoff loan amount and take a hard look at the current value of your car on various websites, including Edmunds.
Much will depend on your make and model, the popularity of your car, how many miles you have on it, and more.
If someone was upside down on a loan for 2021 Toyota Camry, according to Edmunds, the average negative equity was $7,236 in the fourth quarter of 2024.
The Toyota Camry is a vehicle that typically has had good resale value, Drury said, which might have tricked some buyers into not putting much money down when they bought the vehicle. Some buyers might have paid premium prices for the car back in 2021, as well. The Toyota Camry also has been redesigned for the 2025 model year to an all hybrid lineup.
Someone who is upside down on car loan on a 2022 Land Rover Range Rover would be looking at an average of $10,900 in negative equity.
Someone in a negative equity situation trading in a 2021 Volkswagen ID4 late last year was upside down an average of $10,446.
Owners of electric vehicles can face a greater risk of being underwater than owners of traditional vehicles with an internal combustion engine.
The average amount owed on all EVs with negative equity that were traded in to buy a new vehicle was $10,186 in the fourth quarter of 2024. That’s up from a negative equity of $7,116 in the fourth quarter of 2022.
In general, electric vehicles are very new and lend themselves to more depreciation, Drury said, and tend to not have good residual values.
“If someone has purchased an EV recently,” Drury said, “I hope they like it or they lease it.”
One issue, Edmunds researchers said, is this group of EV owners traded their vehicles in sooner than owners of gas-powered cars and trucks. The average trade-in age for EVs that were underwater was 1.8 years, for example, compared with 3.3 years for gasoline-powered vehicles in fourth quarter in 2024.
For the most part, those heady days after the pandemic hit when someone could trade in a car for close to what they paid for it are long gone.
Make no mistake, gap insurance isn’t going to help you with negative equity when you trade in an old car to buy a new one. Gap insurance — short for guaranteed asset protection — covers the difference between the amount owed on car loan and the value of the vehicle covered by the insurance company when your car is stolen or totaled after an accident.
Paying extra money to buy GAP insurance, which is an add-on product, is a strategy to cover those losses associated with theft or totaling the car, not what you would suffer if your loan balance is higher than the value of the vehicle when you trade in your car.
Auto financing:So you’re upside down on your car loan. You’re not alone.
Where to get information about your car’s value
Consumers can track their car’s or truck’s historic value over time on Edmunds at Edmunds.com/appraisal/history by plugging in some information into a tool called “Trade in history.”
Many times, someone who wants a new car every few years could be far better off leasing, Drury said, because they could consistently end up being underwater if they take out a car loan to buy.
Financing to buy a new car when you’re dealing with negative equity on the old one only drives up your borrowing costs and your monthly payment. In some cases, some consumers will roll over the amount they owe on an old loan into the new car loan.
When they owe far more than the old car is worth, though, many consumers can be required by the bank to put down extra cash toward the down payment.
On average, Edmunds noted, buyers whose trade-ins had negative equity in the fourth quarter last year took on an additional $159 in monthly payments and $12,388 more in total amount financed than the industry average for all financed new vehicles. Both of those figures represent all-time records.
“The ramifications for trading in a vehicle well below sea level for a brand-new vehicle can be drastic and lead to a cycle of poor auto financing decisions,” Drury said.
Someone who is significantly underwater would likely be better off trying to hold onto the vehicle for a few more years while keeping up with payments and maintenance.
You do not want being so underwater on a car loan that it causes you to drown in debt.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.