Underwater Auto Loans at Four-Year Peak
More American drivers are finding themselves “underwater” or “upside down” on their auto loans in 2025, meaning they owe more on their vehicles than the cars’ current market value. This trend is complicating the process of purchasing new vehicles.
According to data from Edmunds, 26.6% of trade-ins toward new car purchases in the second quarter of 2025 involved negative equity—a slight increase from 26.1% in the first quarter and the highest proportion since early 2021, when 31.9% of trade-ins were underwater. Ivan Drury, Edmunds’ director of insights, described these figures as “staggering.”
Extent of Negative Equity and Loan Trends
The average amount owed on underwater auto loans in Q2 2025 was $6,754, marginally down from $6,880 the previous quarter. This substantial balance forces many consumers to either cover the gap in cash or roll it into new financing, increasing their overall debt burden.
Brian Moody, senior staff writer at Autotrader and Kelley Blue Book, notes that negative equity is not uncommon given that vehicles depreciate the moment they leave the dealership. However, loan structure choices—such as longer terms or smaller down payments—exacerbate the issue.
Data from Edmunds highlights that 84-month auto loans, which tend to lower monthly payments but extend debt duration, accounted for 21.6% of new auto loans in Q2 2025, up from 19.2% the previous quarter. Meanwhile, 72-month loans declined to 36.1% from 38.6%.
Risks of Negative Equity
Negative equity is particularly problematic when selling or trading in a vehicle, as owners must settle the remaining loan balance above the car’s value. It also poses financial risks in the event of total loss; insurance typically covers only the car’s actual cash value, leaving the borrower responsible for any remaining loan balance.
Strategies for Buyers with Negative Equity
Experts recommend retaining the current vehicle if possible to avoid compounding debt. For those needing a new car, thorough preparation is critical. Prospective buyers should first assess their credit scores, which significantly influence loan interest rates and terms.
Ivan Drury advises consumers to seek pre-approval from multiple lenders to compare financing offers. Dealers may match or improve these offers during the purchase process.
For buyers who must roll over negative equity into a new loan or extend loan terms, considering guaranteed asset protection (GAP) insurance is prudent. GAP insurance covers the difference between the vehicle’s value and the outstanding loan balance in the event of a total loss. According to the Insurance Information Institute, GAP coverage typically adds about $20 annually to an insurance premium when bundled with collision and comprehensive coverage.
FinOracleAI — Market View
The rise in underwater auto loans to a four-year high indicates persistent affordability challenges in the auto market. Longer loan terms and negative equity increase financial risk for consumers, which may dampen new car demand or shift it toward more affordable models.
Auto lenders and dealers face heightened credit risk as borrowers carry more debt relative to vehicle value. Monitoring trends in loan term lengths, credit availability, and insurance uptake (such as GAP policies) will be critical.
Impact: negative
