Right now, most Americans who drive are in a financial pickle. They are increasingly getting “underwater” or “upside down” on their vehicle loans. In recent months we have witnessed a horrifying explosion of a gruesome trend. Today, millions of people are “underwater” on their auto loans, owing more than their cars are worth at this very moment. In fact, recent data shows that in the second quarter of 2025, an all-time high of 26.6% of trade-ins had negative equity. That’s a marginal upward tick from 26.1% in Q1 of this year. It’s the largest share of trade-ins that were underwater, as a percentage, that we’ve seen in four years.
Continued growth of underwater auto loans is bad news for car buyers and the auto industry alike. The share of people in negative equity increased to a high of 31.9% in Q1 2021. Now, that was the last time it made it anywhere near that high. As negative equity rises, this increase coincides with a significant indicator of a market shift. To avoid defaulting on their loans, increasing numbers of consumers are choosing longer loan terms.
In Q2 2025 borrowers with upside-down loans owed an average of $6,754. This is a slight decline from last quarter’s average of $6,880. Despite this reduction, many drivers may still find themselves underwater as soon as they drive off the dealership lot with a new vehicle.
84-month auto loans are now the most common term length. In second quarter 2023, they accounted for 21.6% of new auto loans, an increase from 19.2% just the quarter before. At the same time, 72-month loans took a dip, making up just 36.1% of new loans, compared to 38.6% last year. While longer loan terms are not a long-term fix, they provide short-term help to cash-strapped consumers making high monthly payments. This change makes long-standing negative equity problems much worse.
Given that cars are depreciating assets, buyers are taking default risks by buying cars without full knowledge and transparency. What consumers are unaware of is that they could already be underwater on their loan as soon as they drive off the lot with a new car. All of these details create key questions for future buyers to be aware of.
“Knowing your credit score and knowing what interest rate you qualify for is important to know upfront.” – Brian Moody
For consumers interested in making their way through this treacherous landscape, there are ways to reduce that risk. Buying gap insurance in addition to collision and comprehensive coverage can better protect car buyers from financial loss. Although this rider on an auto insurance policy might only be an additional $20 per year, the added protection and reassurance are invaluable.
Lengthening the terms of an auto loan is another strategy consumers are likely to use to reduce upfront expenses. Longer loan terms can result in greater total interest payments and the risk of future negative equity by virtue of the term length itself.