For many Americans shopping for a new car, the trade-in process is no longer just a simple exchange. A growing number of drivers are discovering that their old auto loan debt doesn’t disappear when they drive off the lot—it rolls directly into their new, more expensive vehicle, leaving them deeper in the red. This phenomenon, known as negative equity or being “upside down” on a loan, has become a significant and costly reality for a sizable chunk of the car-buying public.
What Is Negative Equity and How Common Is It?
Negative equity occurs when you owe more on your car loan than the vehicle is currently worth. According to JD Power’s automotive forecast for March 2025, an estimated 30.5% of new-car buyers who traded in a vehicle were in this position. This marks an increase of 4.2 percentage points from the same period a year ago and continues a trend of rising negative equity that began in 2022.
While this share is high, it’s worth noting it remains below the pre-pandemic peak. In 2019, 33.6% of trade-ins for new-car purchases had negative equity, per JD Power data. Tyson Jominy, a senior vice president at JD Power, describes the current movement as “mean reversion,” suggesting the market is returning to historical norms after a pandemic-driven anomaly.
The Soaring Cost of Being Underwater
The more troubling story isn’t just how many people are affected, but how much they owe. Data from auto shopping site Edmunds reveals that in the fourth quarter of 2025, the average amount of negative equity on these trade-ins hit an all-time high of $7,214. Furthermore, a record 27% of underwater trade-ins carried a staggering $10,000 or more in negative equity.
“While these levels of negative equity are nothing new historically, it’s the amount underwater that is the real, and troubling, story,” said Joseph Yoon, an Edmunds consumer insights analyst.
The Domino Effect: Rolling Debt Into New Loans
When a buyer trades in a car with negative equity, the standard practice is to “roll” the remaining loan balance into the financing for the new vehicle. This means the old debt becomes part of the new loan, effectively financing the loss on the previous car over the term of the new one.
This practice has a direct and severe impact on monthly payments. Edmunds reports that for buyers who rolled negative equity into a new loan in Q4 2025, the average monthly payment reached $916. This is a record high and a full $144 more than the average monthly payment of $772 for all new-car purchases during the same period.
Why Did This Happen? A Tale of Two Markets
The path to today’s negative equity crisis was paved during the pandemic’s unique economic conditions. Initially, the situation improved. In 2022, the yearly share of underwater trade-ins dropped to just 16%, according to JD Power. This was largely due to the supply chain crisis that crippled new-car production.
“The supply chain crisis, which drove up trade values, was a low point for negative equity,” Jominy explained. With fewer new vehicles available, fewer consumers were returning to the market to trade, which artificially inflated used-car prices beyond their typical depreciation curve. This meant many owners suddenly had equity in their vehicles for the first time in years.
The Perfect Storm: Higher Prices and Longer Loans
As new-car production rebounded, the market dynamics shifted dramatically. The average price of a new vehicle in February 2025 was $49,353, according to Kelley Blue Book. This represents a 30.3% increase from February 2020, when the average was $37,876.
Compounding the problem is the age of the vehicles now coming back as trade-ins with negative equity. Edmunds data shows the average is 3 to 4 years old, meaning they were purchased primarily in 2022 and 2023. “This was a truly anomalous period in the market where it wasn’t uncommon to pay over the sticker price,” Yoon noted. Buyers who financed these peak-price purchases are now facing steep depreciation on assets that were already expensive.
To manage the higher costs, buyers have increasingly turned to longer-term loans. Among new-car purchases involving negative equity, a striking 40.7% are now financed with 84-month (7-year) loans. Stephen Kates, a certified financial planner and financial analyst for Bankrate, explains the cycle: “As vehicles have become more expensive, buyers finance a larger portion of the purchase and extend loan terms to afford the payments. Longer loans translate to slower equity build-up and a greater chance that the value of the car falls below what is owed.”
Looking Ahead: Risks on the Road
The central question is whether this record-high negative equity will lead to broader financial stress. So far, auto loan delinquency rates remain stable. A recent TransUnion report shows roughly 1.5% of auto loans are at least 60 days past due, identical to the rate in Q4 2019.
However, experts caution that the sheer scale of debt being rolled into new loans creates a latent risk. “Whether this growth in negative equity leads to future economic ramifications for buyers, both in instance and amount, remains to be seen,” Yoon said. For now, the data paints a clear picture: trading in a car is no longer a simple financial reset for millions of Americans, but a high-stakes decision that can lock them into years of burdensome debt.
