Imagine you owe more money on a car than it’s currently worth. A ton of car buyers are rolling these old “underwater” loans into their new loan. The result is a snowballing debt situation that’s very difficult to escape. How common is this? The number has been increasing for four years and just broke one in four trade-ins toward new car purchases.
Are underwater car loans common?
Yes. A new car or truck depreciates rapidly for its first five years. So you’ll spend a few years underwater on a new vehicle purchase. That’s even before you figure in the fees and interesting your loan includes. But if you can pay down your vehicle in a few years, then keep driving it for a few more years while saving, you’ll be in a great situation when you buy your next car. But millions of buyers are not in a good situation.
During the COVID pandemic, many dealerships were short on new cars and charged more than MSRP for the ones they did have. Used car prices also shot up, with many buyers forced to take out loans for high mileage old cars. Now, it seems the car buying bubble is bursting.
Edmunds just released its Q2, 2025 data: 26.6% of trade-ins for new-car purchases had negative equity. So instead of decreasing their next loan, these “trade-ins” increased the size of the loan. By a lot. In total, 32.6% of those underwater loans added $5k-$10k in debt, 23.4% were over $10k, and 7.7% were more than $15k.
Ivan Drury, Edmunds’ director of insights warns that “pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan.” He adds, “many are at risk of getting stuck in a cycle of debt that only grows harder to break over time.”
He urges buyers to pay down an old car before buying a new one. But obviously, if drivers still owe money on a broken or unreliable old car they may have no choice. Other buyers may have the size of their family increase and are forced to upgrade early. Luckily, used car inventory is much better than during the pandemic so even underwater buyers may be able to find a more affordable option.
