A car equipped with an American V8 engine looks like this
V8s may be harder to find these days, but there are still some available from American brands.
More Americans are trading underwater vehicles.
This does not mean that the vehicle will be submerged in water. In a sense, the same goes for drivers.
Edmunds reports that in the third quarter of 2025, more than one in four trade-ins had negative equity. In auto industry parlance, financing is underwater.
Among used cars traded in for new car purchases between July and September, 28.1% had negative equity. This means the car was worth less than the owner owed on the car loan.
This number was the highest level in four years.
Americans with underwater car loans owed a record amount in the third quarter, averaging $6,905, up from $4,200 during the same period in 2021.
Edmunds found that among car owners who traded in their cars with negative equity, one in three owed more than $5,000, and about one in four owed more than $10,000. These numbers are also the highest ever.
‘Underwater’ drivers can’t wait for new cars
The negative trend in equity suggests that motorists are more willing to take advantage of underwater loans and trade-in rather than waiting a year or two to pay off their loan balances.
“Some people go right back to the dealership,” says Ivan Drury, director of insights at Edmunds. “We have a kind of obsession with the latest and greatest.”
Being underwater on a car loan is a common scenario. Cars tend to depreciate in value over time. Anyone paying off a car loan is competing with the car’s declining value in an attempt to reduce the balance faster than the car’s value declines.
But now, auto loan calculations are especially tough.
Borrowing costs are relatively high. The average interest rate on a 60-month new car loan was 7.6% in August, up from 4.6% four years ago, according to federal data.
On the other hand, the value of cars is also fluctuating. Based on federal data for urban consumers, used car prices were about 15% lower in August 2025 than they were in early 2022.
For buyers who took out auto loans during the years of the pandemic, these trend lines don’t bode well.
If you sell, negative equity becomes a problem.
Negative equity on a car loan may not be a problem if you plan to keep the car until you pay off the loan. If you sell it, you’ll have a problem.
Edmunds reports that negative equity trade-ins are on average 3.7 years old.
Drury said many of those drivers could have stopped or wiped out their losses by simply waiting an extra year or two and paying off some or all of their remaining loan balances. Auto finance companies tend to advance interest, so the older the loan, the less likely it is that the driver will have negative equity.
Auto loans are steadily getting longer as buyers struggle to keep up with rising car prices. Seven-year loans accounted for 22.4% of all new car financing in the second quarter of 2025, an all-time high, Edmunds reported.
Car buyers typically choose longer loan terms to reduce their monthly payments. However, the longer the loan, the more interest you will pay over the life of the loan. And building equity takes even more time.
“The longer the loan term, the less money you’ll get in small increments over the first few years,” Drury says.
Trading in a car with negative equity is expensive.
Incorporating negative equity into a new car loan is costly. Those buyers paid an average of $907 for a new car, compared to the industry average of $767 in the third quarter, Edmunds reported.
Negative equity trade-in buyers financed $11,164 more than the typical new car buyer.
Drury said motorists with negative equity often end up buying cars that cost more than they had planned.
Let’s think about it. If you have $10,000 in negative equity and buy a new car for $25,000 and finance it in full, you would owe $35,000, 40% more than the new car is worth.
Mr. Drury said most lenders would not agree to such terms.
But if you choose a $50,000 car, you’ll owe $60,000, which is 120% of the new car’s price. Lenders are more likely to approve.
“It’s like a vicious cycle,” Drury said.
Edmunds offers valuation tools that you can use to measure your car’s value and determine whether you’re in default on your loan.
Is your car loan underwater? Here’s what to do.
If you’re underwater, here are some tips on how to surface.
pay more
The faster you pay off your loan, the faster you can achieve positive equity. If you can afford it, consider rounding up your monthly payment from, say, $907 to $1,000.
Refinance
Interest rates are falling, and Edmunds is seeing more customers looking to refinance their auto loans at lower rates.
Drury said refinancing can be especially attractive for consumers whose credit score is better now than when they took out their original loan.
If your budget allows, you can refinance with a short-term loan. In that case, your payments will be higher, but you’ll be able to pay off your balance faster.
Please get through it
Experts say the best way to get out of a underwater car loan may be to do nothing: keep the car and keep making payments on the loan. Eventually, the negative equity will dissolve away.
