Nearly a third of car buyers who trade in a financed vehicle are underwater

Nearly a third of car buyers who trade in a car with an outstanding loan are underwater, meaning they owe more on their current car than it’s worth. That share of underwater buyers has increased in each of the past four years, according to a new analysis from the car-buying site Edmunds.

The amount of negative equity some buyers are carrying is growing too.

Here’s the thing about cars: “Most vehicles will depreciate as soon as you drive them off the lot,” said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

If you take out a loan to get that new Chevy Silverado or Subaru Forester, you will likely owe more than the car is worth for a while. If you then go trade it in for a new car in just a few years, you could have negative equity, which rolls into your next auto loan.

“It's just a snowball effect that keeps this debt rolling from generation to generation of vehicle,” Fiorani said.

The fact that about a third of trade-ins have negative equity is not new. That share dropped for a few years, but it was at a similar level pre-pandemic.

What’s different is the amount of auto debt underwater buyers are taking on. They’re borrowing 44% more than they were in 2019, said Jessica Caldwell, head of insights at Edmunds. That’s because they’re carrying more negative equity and interest rates, and car prices are higher.

“That all combined makes a pretty unfavorable monthly payment for these folks with negative equity,” she said.

Automakers do offer incentives that can help some underwater buyers. One of those is often called “customer cash” in car ads, said Tyson Jominy, senior vice president at JD Power.

“You know, ‘Come on in, $2,000 customer cash offer,’ which is just cash that the automaker provides at closing of the vehicle,” she said.

If you’re underwater on your last loan, Jominy said that cash can wipe out some of that negative equity.