'Underwater' car trade-ins are at a 4-year high: What that means when buying a new vehicle

Negative equity in auto loans reached a four-year high in Q2 2025, with 26.6% of new car trade-ins being underwater, averaging $6,754 per loan. This trend is exacerbated by the increasing prevalence of extended loan terms, as 84-month auto loans now comprise 21.6% of new auto loans, up from 19.2% in the prior quarter. This situation compels consumers to either pay the deficit in cash or roll it into new financing, potentially increasing overall debt burdens and signaling growing risk within the auto lending sector.

Analysis

A notable deterioration in U.S. consumer auto finance health is underway, with negative equity on trade-ins reaching a four-year high in Q2 2025 at 26.6%. The average amount of this negative equity stood at a significant $6,754, signaling a substantial financial burden for consumers looking to purchase new vehicles. This trend is being fueled by a structural shift in lending practices, where consumers are extending loan terms to manage monthly payments. Specifically, 84-month loans now represent 21.6% of new auto loans, a sharp increase from 19.2% in the prior quarter, while the share of 72-month loans has concurrently declined. This practice of rolling negative equity into new, longer-term loans creates a cycle of increasing consumer indebtedness and elevates the risk profile within the auto lending sector, potentially acting as a headwind for future new car sales as a growing segment of the market becomes financially constrained.

Key Decisions for Investors

• Investors in auto loan asset-backed securities (ABS) should heighten scrutiny on the loan-to-value ratios and the prevalence of extended-term (84-month) loans within underlying pools, as these metrics indicate rising collateral risk.
• Consider a more cautious stance on auto manufacturers and dealership groups, as the growing number of underwater borrowers may dampen near-term demand for new vehicles or force more aggressive incentives, impacting margins.
• Re-evaluate exposure to subprime and near-prime auto lenders, as they are most vulnerable to defaults and losses stemming from this trend of compounding consumer debt.
• Monitor the uptake of gap insurance products, as its increased use could be a partial mitigator of lender losses in cases of total vehicle loss, though it does not address the core credit risk of the borrower.