A recent report revealed that Americans are increasingly buying new cars even while burdened with “negative equity loans” — situations where their vehicles are worth less than what they owe on them.
According to a report by Edmunds, 28.1% of trade-ins in the third quarter of 2025 involved cars with negative equity, marking the highest level in four years.
The average debt on these upside-down loans reached $6,905, up from $4,200 during the same period in 2021. The report also found that one in four car owners owed more than $10,000 when trading in their vehicles.
Why Do Americans Trade in Cars Despite Losing Money?
Edmunds’ chief economist Ivan Drury explained that the desire for “the newest and best” drives many consumers back to dealerships before fully paying off their current vehicles. Waiting just two more years before trading in could significantly reduce these losses.
Car loan troubles are common since vehicles lose value over time, but the situation has worsened with rising interest rates — 7.6% in August 2025, compared to 4.6% four years ago.
The report noted that trading in a car with negative equity is costly. Buyers who did so paid an average of $907 per month, compared to the overall average of $767. They often ended up purchasing more expensive cars than planned, trapping themselves in a cycle of debt.
Longer Loans, Higher Costs
The study found that Americans are increasingly choosing long-term car loans, with seven-year financing making up 22.4% of all new car loans — a record high. While longer loans lower monthly payments, they extend the period of interest payments and slow the process of building positive equity.
What’s the Solution?
Experts recommend accelerating loan repayment to reduce negative equity and using car valuation tools like those offered by Edmunds to understand a vehicle’s real worth. When possible, consumers should round up their monthly payments to shorten the loan term — for instance, increasing payments from $907 to $1,000 can help build equity faster and reduce long-term interest costs.