The landscape of car loans is becoming increasingly challenging for many Americans, as climbing car prices and interest rates are leading to a notable rise in “upside-down” or “underwater” car loans—where borrowers owe more than their car’s actual worth. This financial predicament is drawing attention to the broader implications and risks associated with negative equity in auto loans.
Negative Equity on the Rise
Statistics from Edmunds reveal a concerning trend: In the last quarter of 2025, about 30% of vehicle trade-ins were tied to negative equity, with the average debt amount reaching a record $7,214. This means that many car owners are starting new loans already underwater, leading to higher payments and increased interest over time.
Jessica Caldwell, director of insight at Edmunds, highlights the ongoing cycle of debt that some buyers face, stating, “The biggest risk is you never get out of it, and it just keeps [compounding].” With each rollover, the debt can grow significantly, potentially leading to scenarios where a consumer pays $50,000 for a vehicle like a Toyota Camry.
Understanding Upside-Down Car Loans
Cars depreciate quickly, especially in their first year, losing up to 20% of their value. This rapid depreciation, combined with loan payments that initially cover interest more than principal, can lead to upside-down loans. For instance, if a car is worth $14,000 but the owner owes $20,000, trading in for a $10,000 car means carrying over a $6,000 balance, creating a loan of $16,000 for a $10,000 asset.
The Consumer Financial Protection Bureau’s 2024 report warns that consumers rolling over negative equity have a 1.5 times higher risk of car repossession within two years. “Negative equity is risky for banks,” Caldwell explains, as it complicates loan approvals.
Risks and Challenges
Negative equity poses significant risks, especially when selling or trading a car. Additionally, if a vehicle is stolen or totaled, insurance typically covers only the depreciated value, not the replacement cost. Thus, gap insurance is often required for financed vehicles, covering the difference between the insurance payout and the loan amount.
Edmunds reports that monthly payments for loans involving rolled-over negative equity have averaged $916, compared to a general average of about $806, highlighting the financial strain on consumers.
Identifying an Upside-Down Loan
To determine if you’re upside down, estimate your car’s market value using tools from Kelley Blue Book, Edmunds, Carfax, or Carvana. Compare this with your loan payoff amount, which can be obtained from your lender. If the market value is less than the loan balance, you have negative equity.
Strategies for Resolution
While there’s no quick fix, options for addressing an upside-down car loan include keeping the car longer, making extra payments to reduce the principal, refinancing the loan, or selling the car privately to potentially get a better price than a trade-in.
Caldwell suggests, “The average age of a trade-in vehicle for people with negative equity was 3.5 years. Could you keep a vehicle longer than that? Yes, absolutely.” Holding onto a vehicle longer allows depreciation to slow, reducing negative equity over time.
Avoiding Negative Equity
To prevent getting upside down in future car purchases, avoid rolling negative equity into new loans, make larger down payments, choose shorter loan terms, and consider buying a used car to avoid rapid depreciation. Pay upfront for taxes and fees, and research cars with strong resale values, like Toyotas and Hondas.
FAQs
What is an upside-down car loan?
An upside-down car loan occurs when the loan balance exceeds the vehicle’s current market value.
How can I avoid being upside-down?
To minimize the risk of negative equity, make a larger down payment, opt for shorter loan terms, and avoid rolling over existing debt into new loans.
Can I get gap insurance if I’m already upside-down?
Generally, gap insurance must be obtained within 30 days of financing. This coverage can pay the difference between the car’s market value and the amount owed if the vehicle is stolen or totaled.
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