The rise of negative equity challenges dealerships and customers alike. On today’s episode of F&I Today, Paul Brown, Vice President of Ascent Dealer Services, explains how negative equity affects trade-in values and how dealerships can protect themselves and customers with gap insurance.
Negative equity, where customers owe more on their vehicle than it’s worth, is reaching critical levels. A recent Edmunds report revealed that in Q4 of 2025, the average negative equity on trade-ins exceeded $7,200, with nearly 30% of customers carrying more than $10,000 in negative equity. This trend is a direct consequence of skyrocketing vehicle prices, longer loan terms (with 84-month loans becoming the norm), and increased MSRPs. The result is that more customers are entering the trade cycle with greater debt attached to their vehicle, making it harder to secure a fair deal on their next purchase.
Negative equity solutions
Brown suggests that F&I managers should require customers to put negative equity down as part of the deal to improve their loan-to-value ratio. If the customer is hesitant to provide the down payment, Brown says you should reinforce the risks of carrying negative equity. “If you roll that debt into your new loan, you’re paying interest on it twice,” Brown advises. “If something happens to your car before you’ve paid off your loan, you could be left paying for a vehicle you no longer own.”
“Most banks don’t want to finance another bank’s negative equity, so it's critical to discuss a down payment with your customer."
Given the high risk of negative equity, gap insurance becomes essential for customers. It covers the difference between the loan balance and the vehicle’s cash value in the event of a total loss. Brown says, “GAP insurance should be a no-brainer for customers—especially those with negative equity. It’s an affordable safety net.” F&I managers should clearly explain gap insurance, especially for customers who roll negative equity into new loans. “Even if your insurance covers some of the gap, it’s unlikely to cover the full difference,” Brown warns. “Most insurance covers up to 125% of value; our GAP insurance can cover up to 150%. Your policy may also leave you responsible for the deductible.”
Turning to a positive conversation
The key takeaway for dealerships facing negative equity is to address the issue confidently. F&I managers should openly discuss risks with customers and highlight the benefits of reducing negative equity and purchasing gap insurance. “By addressing negative equity early and explaining GAP insurance, you not only improve deal structure, but also protect the customer from future financial risks,” says Brown.
Ultimately, gap insurance is a vital tool that protects dealerships and customers. As negative equity persists, F&I departments must proactively equip customers with the information and resources needed for sound financial decisions.
