Is the Rise in Underwater Car Trade-Ins Impacting Your Next Vehicle Purchase?

More drivers are finding themselves "underwater" on their auto loans, meaning they owe more on their car loans than their vehicles are worth. Recent data indicates that 26.6% of trade-ins towards new car purchases had negative equity in the second quarter of 2025, marking the highest level in four years. This situation presents significant challenges for drivers looking to upgrade their vehicles.

Last updated: 25 October 2023 (BST)

Understanding Negative Equity in Auto Loans

Negative equity occurs when the amount owed on a loan exceeds the asset's current market value. In the case of auto loans, this means that drivers owe more than what their cars can fetch in the market. Negative equity can be particularly burdensome when it comes time to sell or trade in the vehicle. The implications stretch beyond just financial inconvenience; they can affect credit ratings and borrowing capabilities.

Key Takeaways

• 26.6% of trade-ins had negative equity in Q2 2025, the highest rate in four years.
• The average underwater loan amount is £6,754.
• 84-month auto loans are increasingly common, comprising 21.6% of new loans.
• Maintaining your current vehicle can prevent rolling over debt into a new loan.
• Gap insurance can mitigate risks associated with negative equity in case of total loss.

The Rise of Underwater Auto Loans

The trend of drivers being underwater on their auto loans has seen an uptick, with data from Edmunds revealing a rise from 26.1% in the first quarter of 2025. This indicates a concerning pattern, as the last significant peak occurred in early 2021, when 31.9% of new car trade-ins were reported to be underwater. This situation can be attributed to several factors, including vehicle depreciation and the terms of the loans themselves.

Why Are So Many Drivers Underwater?

Vehicles typically lose value the moment they are driven off the lot. This rapid depreciation can lead many drivers to find themselves in negative equity situations almost immediately. Several factors contribute to this phenomenon:

• Depreciation: Cars lose value quickly, often by as much as 20% in the first year.
• Loan Terms: Longer loan terms, such as 84 months, can lead to higher amounts owed as payments are spread out over time.
• Down Payments: Smaller down payments can result in higher loan amounts relative to the car's value.

Current Loan Trends

Recent trends indicate that longer loan terms are becoming more common among consumers. According to Edmunds, loans extending to 84 months accounted for 21.6% of new auto loans in the second quarter of 2025, a rise from 19.2% in the previous quarter. In contrast, 72-month loans saw a decrease, reflecting a shift in consumer preferences. This trend may provide temporary relief in monthly payments but can exacerbate the risk of negative equity.

The Financial Implications of Being Underwater

For drivers, being underwater on an auto loan presents significant financial implications. If the vehicle is involved in an accident or is deemed a total loss, the driver is responsible for paying the difference between the loan balance and the car's actual cash value. This can lead to unexpected financial burdens and may complicate the process of acquiring a new vehicle.

Strategies for Managing Negative Equity

For drivers who find themselves in a negative equity situation, there are several strategies to consider:

1. Keep Your Current Vehicle

If possible, maintaining your current vehicle may be the best option. This allows drivers to avoid rolling over debt into a new loan or needing to provide cash to cover the difference.

2. Research Before You Shop

Before visiting a dealership, it's vital to conduct thorough research. Understand your credit score and the interest rates you might qualify for. Higher credit scores generally lead to better loan terms.

3. Get Pre-Approved

Securing pre-approval from multiple lenders provides a clearer picture of your financing options and helps you compare offers. This can aid in negotiating better terms at the dealership.

4. Consider Gap Insurance

If you must trade in a vehicle with negative equity, inquire about gap insurance. This type of insurance covers the difference between what you owe on your car loan and its market value in the event of a total loss, reducing potential financial strain.

The Importance of Financial Awareness

Understanding the implications of negative equity and being aware of your financial situation is crucial for responsible vehicle ownership. Knowledge of loan terms, interest rates, and insurance options can empower drivers to make informed decisions that protect their financial health.

What Happens Next?

As the trend of underwater auto loans continues, it’s essential for drivers to stay informed about market conditions and loan options. The automotive market can be volatile, and being proactive in understanding financing can help mitigate potential pitfalls. Consumers should remain vigilant about their loans and consider their options carefully before making any significant financial commitments.

FAQs

What does it mean to be underwater on a car loan?

Being underwater means you owe more on your car loan than the vehicle's current market value. This negative equity can complicate selling or trading in your car.

How can I find out if I am underwater on my car?

To determine if you are underwater, compare your loan balance with your car's current market value, which can be found through online valuation tools or dealership estimates.

What are the risks of negative equity?

Negative equity can lead to financial strain if your vehicle is totalled or if you wish to trade it in while still owing money. You'll need to cover the difference out of pocket or roll it into a new loan.

Can I roll over negative equity to a new loan?

Yes, you can roll over negative equity into a new loan, but it may result in higher payments and increased risk of being underwater on the new loan as well.

What is gap insurance?

Gap insurance covers the difference between what you owe on your car and its market value in case of a total loss, protecting you from financial loss.