Negative equity is vastly becoming a major pain point in the auto market, with more than 3 in 10 trade-ins now carrying upside-down loans, according to Edmunds.
Joining us on the latest episode of CBT Now is Jessica Caldwell, AVP at Edmunds.com, to discuss the rising trend and what it signals for affordability, financing trends, and the broader auto market outlook.
What’s driving the trend?
According to Caldwell, 30.9% of trade-ins currently have negative equity, reflecting the lingering effects of pandemic-era pricing, elevated interest rates, and extended loan terms that continue to ripple through the market. She said the trend stems largely from the vehicle pricing environment during the microchip shortage, when consumers paid above sticker price amid limited inventory.
As prices normalize, many of those buyers are now returning to the market with vehicles worth less than their remaining loan balances.
Additionally, she notes that scarcity-driven buying decisions also contributed to consumers choosing vehicles that may not have best fit their long-term needs.
As those vehicles re-enter the trade cycle, Edmunds data show the average negative equity sits at about $7,200. Caldwell said that shortfall is often rolled directly into new auto loans, which increases monthly payment burdens and long-term debt exposure. She also notes that average down payments remain relatively low at just over $2,000, further compounding affordability concerns as consumers attempt to move into new vehicles while still carrying existing loan balances.
“When we look at these transactions, what’s worrying is that they don’t really have much of a down payment,” Caldwell said.
To manage higher loan amounts, many consumers are turning to extended financing terms, including loans stretching to 84 months. Caldwell warned that while longer terms can reduce monthly payments, they can also increase the risk of consumers remaining in a cycle of negative equity.
Offsetting pressure
Despite the rise in negative equity, Caldwell said most transactions remain healthy. She asserts that 70% of trade-ins are still either positive or break-even on equity, which helps stabilize overall market activity.
Conversely, she said buyers with positive equity tend to behave differently, often putting more money down and opting for shorter loan terms, which creates smoother transactions for dealers.
Caldwell also points to incentives and financing offers as partial offsets to affordability pressure. Manufacturer rebates and low-rate financing have helped some buyers absorb negative equity, particularly during periods of promotional lending.
Market outlook
Additionally, Caldwell said affordability will remain the central challenge shaping consumer behavior, encouraging dealers to address budget constraints earlier in the sales process to avoid wasted time and mismatched vehicle selection.
Notably, she suggests that rising gas prices have only “modestly” increased interest in EVs, but affordability remains a barrier to broader adoption, particularly for higher-priced EV models. However, she said the used EV market could improve significantly in 2026 as more off-lease vehicles return to market, increasing supply and improving pricing on newer model-year EVs with better range and technology.
“2026 will bring more lease returns, especially 2023 model-year EVs,” Caldwell said. “Those are compelling vehicles that consumers can get at a stronger value point.”
Despite ongoing affordability pressures, Caldwell said the broader market continues to function, supported by consumer necessity and sustained demand. She said that underlying demand continues to support vehicle sales even as financing conditions tighten and affordability concerns persist across the industry.
