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More drivers across the country are “underwater” or “upside down” on their auto loans — meaning they owe more money than the car is worth. That’s costing them when it comes time to buy a new car.
About 26.6% of trade-ins toward new car purchases had negative equity in the second quarter of 2025, according to Edmunds, an auto site. That figure is up slightly from 26.1% in the first quarter of the year, and the highest it’s been in the last four years, said Ivan Drury, the director of insights at Edmunds.
The last time it was higher was in the first quarter of 2021, when 31.9% of new car trade-ins were underwater, according to the report.
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Such drivers are not underwater by insignificant amounts. The average amount owed on upside-down loans in the second quarter was $6,754, down slightly from the prior quarter’s $6,880, Edmunds found.
“It’s a staggering figure to look at,” said Drury.
Drivers trading in an upside-down car will need to come up with cash to pay that balance, or roll it into their new loan, experts say.
How drivers end up ‘underwater’
To be sure, it’s not unusual to see underwater auto loans.
You may already be underwater on your loan from the moment you drive out of the dealer with the new vehicle, as cars are depreciating assets, said Brian Moody, senior staff writer at Autotrader and Kelley Blue Book.
But other choices you make, such as taking on a longer loan term or making a smaller down payment, can exacerbate the issue.
Still, lengthening an auto loan’s terms is “the one thing consumers can do to decrease costs,” said Drury.
It has gotten to the point where 84-month auto loans have become “increasingly common,” he said. In the second quarter of 2025, 84-month auto loans comprised of 21.6% of new auto loans, up from 19.2% the quarter prior, according to Edmunds data provided to CNBC.
To compare, 72-month loans were at 36.1% in the second quarter, down from 38.6% in the same timeframe, according to the data.
It isn’t a problem to have negative equity when you still own and drive the car, Moody said. It becomes an issue when you need to sell or trade it in.
Negative equity can also be problematic if your vehicle is totaled. After an accident, your insurer will typically pay the actual cash value of the car. If that’s less than what you owe on your loan, you’re responsible for the remaining cost.
How to buy a new car when you’re underwater
Keep your current vehicle if you can, experts say, to avoid having to roll that debt into a new loan or come up with cash to cover it.
If you truly need a new car, it’s important to do preliminary research before you even walk into a car dealership. If you have negative equity from a prior auto loan, rolling it over to a lower-interest car loan can help you save on borrowing costs, Drury said.
First, understand what your credit score is, said Moody. Generally speaking, the higher your score, the better the interest rate and loan terms lenders offer you.
“Knowing your credit score and knowing what interest rate you qualify for is important to know upfront,” Moody said.
Try to get pre-approved for different auto loans across several banks or lenders, said Drury. This helps you get a better gauge of the terms you can qualify for and distinguish the best offers.
Once you’re ready to buy, the auto dealer might either try to match the deals you have or offer better financing options, he said.
If you’re going to be underwater on that new loan — say, because you’re rolling in debt from your prior vehicle or taking on a long loan term — ask your auto dealer or insurer about guaranteed asset protection insurance, also known as gap insurance, said Moody.
“Gap insurance covers the difference between what the vehicle is worth, and what is owed on it” if your vehicle is in an accident, according to the Insurance Information Institute, an industry group.
In most policies, adding gap insurance alongside collision and comprehensive coverage can cost an additional $20 per year to the annual premium, according to III.
