An underwater car loan can make it harder to trade in your vehicle without taking on more debt. According to Edmunds’ Q3 2026 negative equity report, 29.1% of trade-ins with outstanding loans toward new-vehicle purchases were underwater in the third quarter. That’s up from 28.1% a year earlier, even though the share has eased from 30.9% at the start of 2026. The average shortfall reached $7,107, about $1,800 above prepandemic levels.
These figures cover people trading in financed vehicles toward new-car purchases, not all drivers or used-car transactions. Still, they offer a useful warning for anyone considering a trade-in while they still owe money on their current car.
Negative Equity Car Basics: How to Tell If You’re Underwater
Negative equity means you owe more on your car loan than your vehicle is currently worth. The Federal Trade Commission (FTC) offers a simple example: if your car is worth $15,000 but you still owe $18,000, you have $3,000 in negative equity.
You can estimate your position in three steps:
Get your payoff amount. Ask your lender how much it would cost to close the loan today. This amount can differ from the balance on your monthly statement.
Check your trade-in value. Compare estimates from two or three pricing guides, such as Kelley Blue Book, Edmunds or NADA Guides.
Subtract the values. If your payoff amount exceeds the estimated trade-in value, the difference is your negative equity. A dealer’s actual offer may differ from an online estimate.
How Drivers Ended Up Upside Down on Car Loans
Negative equity became less common in early 2022, when only 14.7% of financed trade-ins toward new vehicles were underwater, with an average shortfall of less than $4,300, according to Edmunds. But as used-car values fell from pandemic-era highs, owners who paid peak prices, paid above sticker price or took out long-term loans lost much of their equity cushion.
For comparison, roughly one-third of financed trade-ins were underwater between 2016 and 2019, although the average deficit was smaller, typically $5,000 to $5,500.
Used-car values remain an important factor. According to Cox Automotive’s September 2026 Manheim Used Vehicle Value Index report, the index fell to 205.9 in September, down 0.6% year over year and 1.1% from August. Cox now forecasts just 0.2% growth for the index in 2026. Pickups and SUVs continued to trend downward, while electric vehicles and compact cars showed more resilience.
The Manheim index tracks wholesale prices paid in the dealer market, not the trade-in offer an individual owner will receive. Treat it as a market trend signal rather than a personal valuation.
Trading In a Car With Negative Equity: What Rolling It Over Costs
When drivers trade in a car with negative equity, they may be able to add the shortfall to their next auto loan instead of paying it upfront. But this means financing debt from the previous vehicle alongside the cost of the next one.
Edmunds found that buyers who rolled negative equity into new loans in Q3 2026 financed an average of $57,235, compared with $39,732 in Q3 2019. Their average monthly payment reached $952, up from $646, at an average annual percentage rate (APR) of 8.1%. APR represents the annual cost of borrowing, including certain fees.
These borrowers were on track to pay an estimated $16,610 in lifetime interest, and 91.2% took loan terms of at least 72 months. Compared with the average new-car buyer, they financed roughly $12,600 more, paid about $165 more per month and faced approximately $6,700 more in lifetime interest.
Consider an illustrative example: you owe $18,000 on a car worth $15,000, leaving a $3,000 shortfall. If you roll that amount into a new loan at 8.1% APR over 72 months, it adds about $53 to your monthly payment and roughly $800 in interest over the loan term. That interest is an additional cost of carrying debt from a car you no longer own.
How to Get Out of Negative Equity
Depending on your circumstances, you may be able to reduce your negative equity without rolling it into another loan. Consider these options first.
Wait and pay down the loan. Keeping your current vehicle longer while making extra payments toward principal can reduce your payoff amount. The FTC recommends confirming with your lender that extra payments are applied to principal.
Sell privately. A private sale may bring more than a dealer’s trade-in offer, according to the FTC. Ask your lender how to handle the lien and title transfer, and plan to cover any difference if the sale price falls short of the payoff amount.
Buy a less expensive car. Choosing a cheaper next vehicle can reduce the amount you need to finance. According to Experian’s Q2 2026 auto finance data, average used-car loans were $27,852, with monthly payments of $542, compared with $43,610 and $765 for new vehicles. However, average used-car loan rates were higher: 11.19%, versus 6.35% for new vehicles. Compare the total cost of financing, not just the monthly payment.
Choose the shortest affordable loan term. Shorter terms generally mean less time paying interest and can help you build equity sooner. This is particularly important if your new loan includes debt from your previous vehicle.
Bring cash to cover the shortfall. Paying some or all of the negative equity upfront reduces how much debt you carry into your next purchase.
Consider refinancing. If your current interest rate is high, compare refinancing offers before deciding to trade in. Experian reported that auto-loan refinances averaged 7.97% in Q2 2026, compared with an average original rate of 10.40%, saving borrowers about $83 a month. These are historical averages, not guaranteed savings on a new offer. Interest rates can change, so compare current quotes and the total remaining cost of your loan.
Watch for the “We’ll Pay Off Your Trade” Pitch
The FTC warns that dealers may handle negative equity by adding it to the new loan or deducting it from the down payment. A dealer claiming to pay off your old loan while actually rolling the shortfall into your new financing can mislead you about the true cost of the deal.
Before signing, check the contract’s amount financed and confirm how the old loan will be settled. If you believe a dealer has misrepresented the terms, you can report the issue at ReportFraud.ftc.gov.
Know Your Number Before You Shop
Get your lender’s payoff amount and a realistic estimate of your car’s trade-in value before visiting a dealership. If you have negative equity, compare your options and evaluate the total cost of any new loan rather than focusing only on the monthly payment.
This article provides general information, not financial advice.
