With the average cost of a new vehicle approaching $50,000, car buyers have been looking for ways to keep their monthly payments low.
Unfortunately, one of the most popular tricks—extending auto loan terms to six years or more to shave a few dollars off monthly payments—could end up costing drivers thousands of dollars in the long run.
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Below is how this strategy can be a losing proposition, along with some ways to reduce losses.
31% of vehicle trade-ins have a negative net value
As MarketWatch reports, nearly one-third of vehicle trade-ins (31%) now have negative equity, meaning the amount owed on the loan exceeds the market value of the vehicle (1). This is a five-year high as the value of used cars has stabilized from its pandemic-era peak.
According to Edmunds (2), the average trade that is underwater now generates $7,183 in negative equity. Vehicle depreciation is usually the culprit, but long-term loans and small down payments can also play a role.
According to JD Power, long-term loans accounted for more than half of car sales in March 2026: 72-month loans accounted for 40.5% and 84-month loans accounted for 12.8% (3).
“One of the side effects of this is that the equity in the vehicle builds up more slowly,” Michael Sommer, founder of Alaminos Wealth Planning, shared with MarketWatch (4).
For those who typically trade in their cars every three or four years, this slowly building capital can be costly.
“It’s just not something you can get out of unless you pay off the entire car,” Ivan Drury, chief insights officer at Edmunds, told MarketWatch, talking about long-term loans.
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It’s worse for car buyers who walked away with new wheels in 2022, when pandemic-era supply chain problems forced them to pay more than the retail price. If they trade in their cars now, many could face a further drop in the value of their cars due to the higher price they paid up front.
“It’s a risk, especially when consumers roll that amount into their next car loan, worsening the negative equity problem by making the new loan larger,” MarketWatch reports.
This is an issue that often affects people who face negative equity in other areas of their life as well.
According to the Consumer Financial Protection Bureau, vehicle owners who transfer negative equity into a new car loan often have “lower credit scores, lower household incomes, longer loan terms, and (are) more likely to have a co-borrower than consumers with no trade-in or a positive equity trade-in.”
How to mitigate negative equity
According to Go Auto, most vehicles lose between 50% and 60% of their value in just five years and can lose up to 11% by the time they leave the dealership (5).
Fortunately, there are some things drivers can do to avoid selling a vehicle with negative equity. The first two tips involve being proactive when buying a car.
Short term loans
If you can afford the monthly payments, opting for a 60-month loan will allow you to pay off the debt in five years, which is exactly the time at which the vehicle will have lost much of its value. This will allow you to trade in the vehicle without negative equity since your loan has been paid in full.
It also reduces the amount of interest you buy, since at the beginning of a loan term, most of the money in the monthly payments goes toward interest and not principal.
Buy cars that maintain their value.
A great way to mitigate negative equity is to buy cars that generally hold their value. According to Kelley Blue Book, these are the top five cars, trucks, and SUVs that will have the best resale value in 2026 (6):
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Toyota Tacoma 2026: 63% after five years
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Toyota Tundra 2026: 59.9%
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2026 Toyota 4Runner: 58%
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Toyota GR Supra 2026: 56%
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Mercedes-Benz G-Class 2026: 55%
If you already have a car that may be underwater, here are two more tips to mitigate your losses.
Hold on to your vehicle
A sound financial strategy that helps mitigate the high depreciation and interest costs of a long-term loan is to keep the car for more than half of the loan term. This means that a car owner with a 72-month loan would do well to keep it for at least four years, while an owner with an 84-month loan should keep it for at least five years.
This will allow the holder of a long-term loan to pay off a large portion of the debt as the vehicle loses value, which could help limit negative equity once the owner decides to sell or trade it in.
As JD Power’s Tyson Jominy explained to MarketWatch, a car owner with $2,000 in negative equity might consider keeping the car for another six months to a year, which could allow the owner to cover loan expenses.
Use cash incentives to offset negative equity
Many car companies offer incentives that can help trade-in customers offset negative equity. In fact, some companies may offer more with their incentives because their vehicles tend to depreciate faster.
“They structure their incentives to reach their customers wherever they are,” Jominy told MarketWatch.
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Article sources
We rely only on verified sources and credible third-party reports. For more details, see our ethics and guidelines.
Market surveillance (1), (4); Edmunds (2); JD Power (3); go auto(5); Kelley Blue Book (6)
This article originally appeared on Moneywise.com with the title: American drivers are falling into an expensive buying habit as the average price of a new car approaches $50,000.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
