Why Are More Americans Upside Down on Their Car Loans?

As of the first quarter of 2026, three in 10 car shoppers trading in their vehicle owe more on their auto loan than the car is worth, according to a recent report from Edmunds. This condition, known as negative equity or being “underwater” on a car loan, has develop into increasingly common since 2022. The average negative equity on a trade-in was $7,183 at the finish of Q1 2026, marking the second-highest quarter on record for this metric.

The rise in underwater car loans is largely tied to the aftermath of the pandemic-era vehicle shortage, during which consumers paid inflated prices for fresh and used cars. As those vehicles have depreciated faster than loan balances have decreased, many borrowers now find themselves owing more than their cars are worth when they attempt to trade in or sell.

How Negative Equity Affects Car Buyers

When a car owner has negative equity, trading in the vehicle toward a new purchase does not eliminate the existing loan balance. Instead, the shortfall is often rolled into the financing for the next car, increasing the new loan amount and monthly payments. This cycle can lead to deeper debt over time, especially if the borrower continues to trade in vehicles before fully paying off the loan.

According to industry analysts, affordability remains a major concern in the auto market. Rising vehicle prices and interest rates have made it harder for consumers to stay in the same vehicle they previously owned at a similar cost, pushing some toward longer loan terms or leasing as alternatives.

Why Leasing Is Gaining Appeal

Some consumers are turning to leases as a way to avoid negative equity altogether. A lease typically lasts two to four years and does not build ownership equity, but it also eliminates the risk of owing more than the vehicle is worth at the end of the term. Since the lessee returns the car to the dealer, they are not responsible for its depreciation beyond normal wear and tear.

Ester Horowitz, a CarJoy auto broker based in Carle Place, noted an uptick in Long Islanders seeking leases in recent years, citing protection from negative equity as a strategic reason for the shift.

Industry Concerns About Auto Finance Stability

Experts warn that the growing prevalence of underwater car loans could signal broader stress in consumer finances. Tom Libby, an auto analyst at S&P Global, said that while the auto finance system is not currently at a breaking point, the combination of rising prices, higher interest rates and rapid depreciation is creating pressure on household budgets.

Data from the Manheim Used Vehicle Value Index shows that used-car values have fallen more than 20% since peaking in early 2022, accelerating the pace at which vehicles lose value relative to outstanding loan balances.

What Borrowers Can Do

Financial advisors recommend that consumers considering a vehicle trade-in first determine their car’s current market value and compare it to their remaining loan balance. Tools like Kelley Blue Book or Edmunds’ appraisal calculators can help estimate equity. If negative equity exists, options include delaying the trade-in until more of the loan is paid off, making extra payments to reduce the balance faster, or exploring a lease to avoid carrying negative equity forward.

Transparency with lenders and dealers about the trade-in situation is also critical, as some may offer incentives or flexible financing to help mitigate the impact of negative equity on a new purchase.

Key Takeaways

• Three in 10 car shoppers trading in a vehicle in Q1 2026 had negative equity, averaging $7,183 per borrower.
• The trend has grown since 2022, driven by pandemic-era overpayment and rapid vehicle depreciation.
• Rolling negative equity into a new loan increases debt and monthly payments over time.
• Leasing is becoming a popular alternative to avoid negative equity risk.
• Experts advise checking loan balance vs. Car value before trading in and considering payment strategies to reduce equity gaps.

Frequently Asked Questions

What does it indicate to be “upside down” or “underwater” on a car loan?

It means you owe more on your auto loan than the vehicle is currently worth. This is also referred to as negative equity.

How common are underwater car loans in the U.S.?

As of Q1 2026, approximately 30% of trade-ins toward new car purchases involved negative equity, according to Edmunds.

Can I trade in my car if I have negative equity?

Yes, but the difference between what you owe and the car’s value is typically added to your new loan, increasing your debt and monthly payments.

Is leasing a good way to avoid negative equity?

Yes, because you return the vehicle at the end of the lease term and are not responsible for its depreciation beyond normal apply, eliminating the risk of owing more than it’s worth.

What caused the increase in underwater car loans since 2022?

The surge followed the pandemic-era vehicle shortage, during which consumers paid premium prices for cars that have since depreciated faster than loan balances have declined.