More than one in four car trade-ins are underwater, a four-year high, according to Edmunds.
Underwater car owners are carrying thousands in debt into new loans, with some owing over $15,000.
Buyers rolling negative equity into new loans face record-high monthly payments averaging $915.
The Federal Reserve Open Market Committee meets this week and is widely expected to cut a key interest rate by a quarter point. If it does, it could make auto loans slightly more affordable.
That would serve as much-needed relief for consumers in the market for a new or used car, as recent data from automotive publisher Edmunds show a rising number of Americans are finding themselves upside down on their car loans.
In the second quarter of 2025, 26.6% of trade-ins toward new-car purchases carried negative equity — meaning owners owed more on their vehicles than they were worth. That marks the highest share in four years and a jump from 23.9% during the same period last year.
For many borrowers, the gap between what they owe and what their cars are worth isn’t small. The average amount of negative equity in the second quarter was $6,754, slightly below the first quarter’s $6,880 but up from $6,255 in the second quarter of 2024.
Even more concerning: a growing portion of drivers are dragging major debt into their next purchase. Edmunds found that:
32.6% of underwater trade-ins carried between $5,000 and $10,000 in debt.
23.4% owed more than $10,000.
7.7% were upside down by over $15,000
High stakes
“Consumers being underwater on their car loans isn’t a new trend, but the stakes are higher than ever in today’s financial landscape,” said Ivan Drury, Edmunds’ director of insights. He noted that higher vehicle prices and interest rates are compounding the effects of early trade-ins and rolling over debt, pushing many buyers into a cycle of mounting obligations.
Car buyers fall into negative equity when they purchase expensive vehicles with a minimum down payment and finance them over extended periods. The vehicle’s value drops faster than the owner pays down the loan.
Edmunds’ analysis shows just how costly negative equity can be. In the second quarter, buyers who rolled debt into new loans paid an average $915 per month, the highest on record for this group and $159 more than the industry average monthly payment of $756. These buyers also financed $12,145 more than typical new-vehicle purchasers.
Car value vs. loan balance
Joseph Yoon, Edmunds’ consumer insights analyst, cautioned that anyone considering a trade-in should first check whether they’re underwater by comparing their loan balance with their car’s trade-in value.
“Holding onto your current car and staying current on payments and maintenance may be the wisest choice,” he said, adding that careful research and smart shopping can help offset financial risks.
For households already stretched thin, the findings underline the risks of rushing into a new car purchase without accounting for lingering debt. As financing costs remain elevated, experts suggest patience and planning may be the best defenses against becoming trapped in a cycle of negative equity.