More and more automobile buyers are in a difficult economic situation. According to a recent report from Edmunds, more than 26% of new car trade-in in the second quarter of 2025 were negative capital, with that percentage being the highest in over four years.
Negative capital refers to the fact that you are in debt more than the value of the car and the loan is “upside down” or “submerged.” If you are replacing your car with another new one, negative capital is a serious problem as you will have to pay off your debts and also pay for the new loan at the same time. The average debt for these upside down loans is $6,754, highlighting the increased risk of automobile liability in today’s market.
“It’s not a new trend for consumers to be in a difficult position with car loans, but in today’s financial situation, the risk is even higher than ever,” said Ivan Drury, director of insights at Edmunds. “From rising car prices to rising interest rates, pressure on affordability is further exacerbating the negative impact of decisions like early trade-in and incorporating debt into new loans.”
In other words, it’s become easier than ever to turn your loans upside down. However, steps can be taken to avoid the worst negative capital.
Keep driving your current car for a long time
If you’re already in bankruptcy, the easiest way to avoid digging any more economic holes is to keep your current car and keep paying. In many cases, time and patience are your best ally. Every time you make a payment, your balance will decrease and your vehicle’s depreciation will decrease after the first few years. Ultimately, your loan balance will fall below the price of your car.
This strategy requires discipline and the ability to resist the temptation to switch to something newer. However, you can avoid spending money you don’t need. According to Edmunds data, buyers who have now had negative car capital and incorporated into new car loans paid an average of $915 a month, while the industry average was $756. They also lend $12,145 more than the average new car buyer.
It may not be interesting to keep on driving your current car until your balance catches up, but in many cases it is the surest way to avoid an increase in debt.
Incorporate refinance or debt into a new car lease
Refinancing may help ease the negative capital impact. If your credit score improves or interest rates drop compared to when you first lend, the new loan could reduce your monthly payments and buy you time to get back.
Another option is to lease your next car rather than buying it. You will have to pay a higher monthly payment than usual, as you will be repaiding the negative capital of your current car along with the lease payment for your new car. At the end of the lease, it will no longer be upside down and will be separated from the car at the end of the lease. But there’s a problem there. There is no vehicle available to trade in for your next purchase. You can either lease again or fund your next new or used car purchase.
Avoid negative capital in the first place
The best solution is prevention. Edmunds experts point out that when you buy a new car, you often end up in a depreciation hole the moment you drive it. A new car usually loses about 20% of its value within the first year. This means that if you don’t pay a large down payment, even a small loan can still be in debt that exceeds the value of your car. What’s the solution? Buy second hand.
Buy a used car and avoid the worst depreciation. A two- or three-year old car should still have a good lifespan and still have a warranty. If you value security, consider purchasing a certified used car. These vehicles must pass the dealer’s inspection and are usually accompanied by an extended warranty. This strategy helps minimize the risk of sinking underwater in one or two years.
Another important step is to pay a lot of down payments. Edmunds recommends aiming for at least 20% down. This cushion will reduce your loan balance faster than the value of your car, resulting in more positive capital.
Finally, avoid extremely long loan periods. You are tempted to extend your loan period to 72 months or even 84 months to lower your monthly payments. However, this will make it more upside down. A loan within 60 months costs more monthly, but is much safer financially.
Edmunds says
It’s not fatal to be submerged while paying off your car’s loan, but it requires discipline to escape. The first step is prevention. Buy smartly, make a solid down payment and avoid excessively long loans. If the positions are already reversed, the best option is usually to keep the car up until it regains its capital.
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This article was provided to the Associated Press from a car-related website. Edmunds. Josh Jacquot is a contributor to Edmunds.
