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Upside-down loans are becoming a big problem for new-car shoppers in the U.S. Research by shopping and editorial resource Edmunds found that more than 26 percent of all trade-ins on recent new-car purchases included negative equity on the loan, meaning its owner owes more on the vehicle than it’s worth. And since that backwards cash flow gets rolled into the new car’s financing – which then suffers severe depreciation the moment it’s sold – the problem may only be compounding itself.

What Is A Negative-Equity Loan?

Using financing to purchase a car isn’t uncommon, since few people are able to save up the $30,000 or $40,000 required to buy a nice Honda Civic hatchback or Toyota Tacoma pickup outright. After fronting a cash down payment, which ideally is 10 to 20 percent of the car’s selling price, owners then finance the remainder of the cost over a period of several years, repaying the loan back with interest. The problem is that a new car loses more value in its first three years than later in life, meaning if your payments don’t keep up, you’ll end up with negative equity (also called being “upside down” or “underwater” on the loan).

Edmunds data for the second quarter of 2025 shows that this is becoming a growing problem for American car shoppers, when 45.7% of new car purchases were made with a trade-in vehicle, of which 26.6% had negative equity. Those numbers have been trending up for the past few years; in 2024, 44.8% of new purchases factored in a trade-in, of which 23.9% had negative equity, while in 2023, only 17.3 percent of trade-ins were underwater. And if the problem wasn’t bad enough already, the amount of negative equity is growing, averaging $6,754 per trade-in through the second quarter of 2025 – an increase of $499 compared to last year and $1,211 from 2023.

Why Is Being Upside Down On A Loan Bad?

In order to absorb the cost of paying off a trade-in’s loan, almost every dealer or banking institution will include the negative equity in the new car’s financing. For example, the average owner with negative equity is adding $6,000 or more to their new-car loan, turning a $30,000 Civic hybrid into something that costs 20% more. Considering that theoretical hatchback will lose around 10 percent of its value the moment it drives off the lot, that hefty financing is going to look and feel worse if its owner isn’t able to pay off the loan before trading in again.

In order to avoid becoming upside down on a vehicle loan, most financial experts agree that it’s important to make monthly payments on time and to keep up with vehicle maintenance and care to help ensure its resale value remains as high as possible. Furthermore, it’s usually a good idea to pay off a vehicle before going new-car shopping, since you’ll actually get some credit for the trade-in rather than adding additional costs to your next loan.

How Did Negative Equity Become Such A Big Problem?

Many new-car shoppers in the past several years have had to face the nearly unavoidable reality of negative equity. Part of the problem has been the volatility of the car market since the Covid-19 pandemic, which caused significant supply-chain shortages that led to significantly lower vehicle inventory and higher prices on both new and used vehicles. Those loans, which often included dealer markup and inflated prices, quickly went underwater once supply chain constraints eased and resale values fell.

Another big issue facing modern shoppers is ever-higher average transaction prices that have outgrown most buyers’ wages. In order to make monthly payments affordable enough, many shoppers have opted for seven- or eight-year vehicle loans, which often charge much more interest in the long run. In those cases, it might be wise to consider refinancing the vehicle loan, especially if you make more money or have better credit now than when the loan was new, which could potentially lower your financing’s interest rate and save some cash over time.

Source: Edmunds