Brace yourself: a staggering number of car owners are drowning in debt when trading in their vehicles for new ones.
According to News Nation, more than one in four trade-ins for new cars are "underwater," with owners owing more on their loans than their vehicles are worth, a trend hitting a four-year high at 26.6% in Q2 of this year, according to Edmunds.
This negative equity percentage climbed from 26.1% in Q1 of this year. It’s also up sharply from 23.9% in Q2 of last year. Back in 2021, the rate was even higher at 31.9%, showing how cyclical and persistent this problem can be.
For those caught in this trap, the numbers are grim. The average amount owed on these upside-down loans in Q2 was $6,754. While that’s slightly down from $6,880 in Q1, it’s still higher than the $6,255 seen in Q2 of last year.
Why does this matter to you? When buyers roll negative equity into a new loan, they’re not just resetting the clock—they’re piling on more debt at worse terms.
And the pain doesn’t stop there. The average monthly payment for those rolling over negative equity hit a record $915 in Q2. That’s $159 more than the industry average of $756 for all new-car buyers.
Even more striking, buyers with negative equity financed $12,145 more than the typical new-vehicle purchaser. This isn’t just a small misstep; it’s a financial anchor dragging them deeper into debt.
Experts at Edmunds point to broader economic pressures as fuel for this fire. “Affordability pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early,” said Ivan Drury, Edmunds’ director of insights.
“And as buyers take on new loans with much higher interest rates than those from just a few years ago, even potential tax deductions can’t meaningfully offset the thousands more they’ll pay in interest,” Drury added.
Drury also warned of a vicious cycle. “With a growing share of upside-down owners thousands of dollars in the red, many are at risk of getting stuck in a cycle of debt that only grows harder to break over time,” he said.
This isn’t just a statistic—it’s a wake-up call for anyone eyeing a new car. The free-market principle of personal responsibility shines here: no one forced these buyers to trade in early or roll over debt, but distorted credit markets and easy lending have encouraged reckless decisions.
So, what’s the way out? Start by knowing your numbers. Experts suggest checking your loan payoff amount and comparing it to your car’s current trade-in value to see if you’re underwater.
Don’t let dealerships sweet-talk you into rolling negative equity into a new loan. Hold off on trading in until you’ve paid down more of your current loan, or consider a cheaper vehicle to break the cycle.
For wealth-builders, this is a reminder to prioritize frugality over flash. Cars are depreciating assets—treating them as status symbols rather than tools can lock you into a losing financial game. Ultimately, liberty in financial choices comes with the burden of due diligence. Avoid the trap of endless debt by making informed, disciplined decisions today—your future self will thank you.