Why Auto Loans Are Increasingly “Underwater”
More than one in four consumers—26.6 percent of those trading in a vehicle for a new one—now owe more on their auto loans than the car is worth, the highest level in four years (The Washington Post). In the second quarter of 2025, the average negative equity owed on such loans reached $6,754, up from $6,255 one year earlier, with nearly a quarter of borrowers owing over $10,000 and nearly 8 percent owing more than $15,000 (The Washington Post).
How Did So Many People End Up Underwater?
High initial prices and rapid depreciation
Pandemic-related shortages pushed used‑car prices to skyrocket. Those who bought during the peak quickly found their car’s market value dropped significantly as supply returned, worsening the equity gap (WIRED).
Minimal down payments or no down payment
Since cars typically lose 20 percent of their value immediately once driven off the lot, buyers who made no down payment started with negative equity from day one (Debt.org).
Longer loan terms and rising interest rates
Borrowers are using 72‑ or 84‑month loans to lower monthly payments—but these long terms slow the rate at which principal is paid down, while the vehicle continues to depreciate (Edmunds, Debt.org). At the same time, average interest rates remain high—over 7 percent for new cars and around 11 percent for used vehicles—adding to the imbalance (Edmunds, Intuit Credit Karma).
Rolling negative equity into new loans
Instead of paying off the old loan before trading in a vehicle, many buyers roll that debt into their next car loan, creating deeper negative equity and higher monthly payments from the outset (Edmunds).
Consequences of Being Underwater
Record-high monthly payments
Borrowers who carry negative equity and roll it into a new vehicle now average monthly payments around $915, with nearly one in five paying over $1,000 per month (Yahoo).
Financial stress and risk of defaults
Stuck in a cycle of debt, many owners face difficulty trading in, refinancing, or selling. Payment trouble can lead to delinquencies or even repossession, with lasting credit damage (Axios).
How to Avoid Becoming Upside Down on Your Loan
Make a substantial down payment
Putting at least 20 percent down reduces the gap between your loan and vehicle value, giving you a better chance to stay equity-positive.
Choose shorter loan terms
Four- or five-year loans help you pay down principal faster and reduce total interest paid. Avoid 84-month terms when possible (Investopedia).
Avoid rolling negative equity into a new loan
If you still owe on your current car, consider paying down that balance before trading it in rather than passing it into a new vehicle loan.
Refinance when appropriate
If you have good credit and can secure a better rate, refinancing into a shorter loan term or lower APR can accelerate equity building and reduce total interest costs (Yahoo, Debt.org, Intuit Credit Karma).
Drive your current car longer
Keeping a vehicle beyond the loan term or until equity turns positive can avoid rolling debt into new purchases. Many Reddit users report simply paying extra principal or waiting years before trading in (Reddit).
What to Do If You’re Already Underwater
Request multiple valuations
Use tools like Edmunds, Kelley Blue Book, or NADA Guides to estimate your car’s trade-in value and calculate your negative equity before making any decisions, supported by data (Intuit Credit Karma).
Set up extra payments toward the principal
Even small additional payments reduce your balance faster and minimize negative equity over time.
Discuss refinancing or lender options
Contact your lender proactively to explore rate adjustments or alternate repayment plans that might help.
Selling privately instead of trading in
A reliable private sale often fetches more than dealership offers, letting you reduce or eliminate the loan gap more effectively.
Conclusion
Record-high rates of underwater auto loans reflect a perfect storm of high vehicle prices, minimal down payments, extended loan terms, and a penchant for rolling over old debt. The key to avoiding this trap lies in smart borrowing strategies—such as making a solid down payment, choosing shorter loan terms, and avoiding roll‑overs of negative equity. If you’re already upside down, taking steps to accelerate principal repayment or refinancing may help you dig your way out.
