Almost one in three Americans trading in a vehicle now owes more than the car is worth, a share that has climbed to a five-year high as ballooning loan terms and softening used-car values trap buyers in a cycle of rolling debt from one purchase to the next.
The numbers come from Edmunds, the automotive-research firm, which found that nearly 31% of vehicle trade-ins carry negative equity. The average shortfall: $7,183, money that doesn't vanish when the keys change hands but instead gets folded into the next loan, making the new balance bigger before the buyer drives off the lot.
MarketWatch reported on the trend, drawing on data from Edmunds, JD Power, and a 2024 Consumer Financial Protection Bureau analysis of auto-finance data. Together, those sources paint a picture of a car market where sticker prices keep rising, loan terms keep stretching, and the gap between what a buyer owes and what the vehicle is worth keeps widening.
New-car prices have crept toward $50,000 on average. To keep monthly payments manageable, lenders and buyers have turned to longer and longer loan terms. JD Power data from March show that loans of 72 months accounted for 40.5% of car sales. Another 12.8% carried terms of 84 months or longer.
Michael Sommer, founder of Alaminos Wealth Planning, explained the math plainly:
"One of the side effects of this is that equity in the vehicle builds more slowly."
That slow equity build collides with a simple fact of car ownership: most depreciation happens in the first three years. Buyers who are accustomed to trading in every three to four years run headlong into negative equity because the loan balance hasn't caught up with the car's declining market value.
Ivan Drury, director of insights at Edmunds, told MarketWatch that once a borrower is underwater, patience is about the only cure:
"It's just not something you can dig your way out [quickly] of unless you pay off the entire car."
And for years, an unusual market quirk masked how deep the problem ran. Pandemic-era supply-chain disruptions pushed used-car values to historic highs, sometimes above original sticker prices. That inflated trade-in value kept many owners from appearing underwater even when their loan balances were large.
Drury noted the shift bluntly: "The only thing that saved people in prior years from not being so upside down is simply that used[-car] values were so much higher [after the pandemic]." Now that used-car prices have cooled, the safety net is gone. The real exposure is showing up in the data.
Edmunds found that the average trade-in carrying negative equity is just 4.3 years old. Among those underwater, 41%, the largest single group, owe $5,000 or less beyond the car's value. That may sound manageable until it gets rolled into a fresh six- or seven-year loan on a vehicle approaching $50,000.
The CFPB's 2024 analysis described the borrowers caught in this cycle: they tend to have "lower credit scores, lower household income, longer loan terms and [are] more likely to have a co-borrower than consumers with no trade-in or a positive-equity trade-in." In other words, the people least equipped to absorb extra debt are the ones accumulating it fastest.
The consequences are not abstract. The same CFPB analysis found that consumers who roll over negative equity are "more likely to have their account assigned to repossession within two years." That means a family that traded in one car to escape a payment they couldn't sustain may lose the replacement, too, along with whatever equity existed in either vehicle. The pattern fits within a broader rise in household debt and delinquencies that has been building for years.
Tyson Jominy, JD Power's senior vice president of OEM customer success, offered a candid explanation for why drivers trade in vehicles they still owe money on: some simply "love the new-car smell." Others face unexpected repair bills once a warranty expires and decide a new monthly payment beats an unpredictable mechanic's tab.
Dealers, for their part, have every incentive to keep the cycle spinning. Jominy noted that manufacturers structure promotional offers to meet buyers where they are financially, even if "where they are" is underwater. When a buyer with negative equity walks onto a lot during a promotional period, the dealer can fold the old loan balance into the new one and apply manufacturer incentives to soften the blow.
Jominy described the calculus: if those buyers waited, "they would get the full value of these incentives that are being offered." But waiting requires discipline, and the showroom floor is designed to reward impulse. The dynamic is not unlike the pressure buyers face in a housing market shaped by mixed signals, where affordability pressures push people into decisions they may regret.
Jominy offered a rough rule of thumb: keep a car for longer than half the loan term. That means at least four years on a 72-month loan and more than five years on an 84-month loan before trading in. For owners with less than $2,000 of negative equity, waiting another six months to a year might be enough to break even.
The advice sounds simple. But it runs against a car culture built on frequent upgrades and against a financing system that makes it easy, even profitable for dealers, to roll debt forward indefinitely.
Drury pointed out that certain vehicles hold their value far better than others. "Usually it's the same subset of vehicles that consistently ranks up there with best resale values," he said. Caredge.com data bear that out: the GMC Sierra 3500HD retained 80.3% of its value after five years, followed by the Toyota Tacoma and Chevrolet Silverado 3500HD at 78.4% each. The Toyota GR86 and Toyota GR Supra each held 76.9%. Toyota, Subaru, and Honda ranked among the brands with the strongest resale value overall.
For buyers who choose wisely and hold long enough, the math works. For those who don't, or can't, the debt compounds. Unexpected ownership costs, from major manufacturer recalls to routine maintenance surprises, only accelerate the pressure to trade in early.
What emerges from the data is not a story of reckless consumers alone. It is a story of a financing system that stretches loans to seven years, a market that inflates sticker prices past $50,000, and a promotional structure that makes it painless, in the short term, to roll thousands of dollars of old debt into a shiny new obligation.
The CFPB flagged the risk. Edmunds quantified it. JD Power explained the incentives. And still the share of underwater trade-ins climbs. Even motorcycle owners face costly post-purchase surprises that can strain already tight budgets.
Back in 2022, supply-chain chaos had buyers paying above sticker price just to get a vehicle. That era papered over the underlying fragility. Now the bill is coming due, and the borrowers least able to pay it are the ones holding it.
In a healthy credit environment, changes to how creditworthiness is measured might help some borrowers access better terms. But no scoring tweak fixes a loan that was too large on the day it was signed.
Nearly a third of trade-ins are underwater. The average shortfall is more than $7,000. Loan terms keep stretching. Used-car values keep cooling. And the people rolling debt forward are the ones the CFPB identifies as most likely to lose the car entirely within two years.
Nobody forced these buyers to sign. But a system that makes it effortless to bury yourself in rolling auto debt, and profitable for every party except the borrower, isn't a free market working well. It's a trap with a monthly payment.