In June, a salesperson at Always Auto, a car dealership in Wichita Falls, Texas, walked into owner Josh Letsis’ office looking for help with a trade-in.
A customer wanted to trade in a 2025 Ram 3500 with just 14,000 miles on it. He was paying $1,472 a month and hoped to lower his payment.
The problem? He owed about $79,000 on a truck valued at roughly $58,000, according to Letsis. That left him about $21,000 in negative equity, which is when a borrower owes more on their car loan than the vehicle is worth. In other words, he was deeply underwater on his loan.
Without any money to put down, the customer had few options for getting out of the truck while also lowering his monthly payment. Letsis ultimately advised him to keep the Ram and continue paying down the loan.
The roughly $21,000 hole is an extreme example of negative equity. But the way the customer was shopping — focused on lowering his monthly payment while carrying that debt — isn’t out of the ordinary, Letsis says. “This is a conversation I probably have two or three times a day,” Letsis adds. “If you have a bunch of negative equity, it’s very difficult to lower your payment.”
And it can create a vicious cycle. As negative-equity balances grow, some buyers risk falling into what experts describe to CNBC Make It as “permanent car debt” — carrying unpaid balances from one vehicle to the next, stretching out their loans and digging a deeper financial hole with each trade-in.
Negative equity itself isn’t new. What has changed is how deep the typical hole tends to get. As car prices have risen, the average amount of negative equity among underwater trade-ins has climbed from $4,576 in 2015 to $6,884 in the second quarter of 2026, according to automotive research firm Edmunds. About one in four underwater trade-ins now carry more than $10,000 in negative equity.
Letsis says negative-equity balances of that size were far less common five years ago.
“You had to have had a high-dollar Mercedes or some sort of high-line car to have $20,000 negative equity,” he says. “And now you can have it in a Ford pickup truck.”
What is causing the ‘permanent car debt’ trap
Rising car prices are one obvious reason negative-equity balances have grown. Average transaction prices for new vehicles have climbed about 31% since 2019, rising from $37,310 to $48,963, according to Edmunds.
But alongside rising prices, a less obvious change has emerged: Loan terms that once seemed unusually long have become the new normal.
In 1974, The New York Times reported that Ford was “experimenting” with 48-month loans as rising auto prices squeezed buyers. By 2010, the average new-car loan at finance companies lasted about 60 months, according to Federal Reserve data. Five years later, it was roughly 65 months. Today, the average new-car loan lasts about 70 months, according to Edmunds.
A good chunk of buyers are willing to stretch things even further: About one in four buyers financing a new vehicle now takes out a loan of 84 months or longer, according to Edmunds. That’s a record high.
“When I first got into the car business a long time ago, it was pretty much 60 months, and every now and then you do a 72-month loan,” Letsis says. “And now it seems like 72 is just standard, even on a used car, and people are doing 84 months, 78 months, 75 months.”
A longer-term loan isn’t necessarily a bad thing for car buyers, financial pros say. As with any car financing deal, a buyer who makes payments for the life of the loan will eventually own the vehicle outright. Problems can arise, however, if they want or need to replace the car before they’ve paid down enough of what they owe.
Among vehicles traded in with negative equity, the average trade-in age is four years, according to Edmunds. By that point, a typical new car has lost nearly half its original value due to depreciation, according to Kelley Blue Book.
Meanwhile, borrowers pay down their loans more slowly in the early years, when more of each payment goes toward interest. A longer loan can widen that gap, leaving the borrower owing more as the car loses value.
And when a buyer trades in a car while still owing more than it’s worth, that debt doesn’t disappear. Unless the balance is paid off first, it gets rolled into the next car loan, leaving the buyer with more debt and more interest to pay.
With a higher balance, a buyer looking to keep the monthly payment manageable has two options: choose a cheaper car or stretch the repayment period even further.
“When people are upside down on their existing loan and they need to roll over, say, $5,000, $10,000 … the easiest way to make that next car affordable is to tack on a year, tack on two years,” says Ivan Drury, director of insights at Edmunds.
For buyers who repeat that process, longer loans and repeated trade-ins can begin to reinforce each other, says Charles Chaffin, a professor at Iowa State University who specializes in financial psychology.
“The problem we have is when we are trading in cars after three years and we’re underwater with the car that we’re trading in now, we’re in this element of permanent car debt,” Chaffin says. “That long loan is combined with these trade-ins and now it just snowballs. And now individuals are constantly financing a car.”
The larger the amount of negative equity, the harder that cycle can be to break, Drury says. Borrowers carrying negative equity are particularly likely to stretch their next loan. About 43% of buyers who rolled negative equity into a new-car loan took out an 84-month loan in the first quarter of 2026, according to Edmunds.
“For a lot of people, $1,000, $2,000, no big deal, whatever, just pay off your loan, it’s fine,” Drury says. “But once you start dipping into that $7,000, $8,000, $9,000, $10,000 upside-downness of your current vehicle being rolled into your next one, you might never own the car.”
The risk of shopping the monthly payment
For some buyers, financial trouble starts before they ever set foot in a dealership or even look at a car.
That’s because they budget for the monthly payment they can afford, rather than the total price they’re willing to pay for the car, Chaffin says. A buyer who knows they have an extra $500 a month might see a $425 car payment and think, “I can make that … so I’m set,” he says.
Chaffin describes this as “anchoring,” where the monthly payment becomes the number the buyer fixates on when deciding what they can afford.
But having $500 available each month doesn’t necessarily make a $425 car payment affordable, particularly if it leaves little room for other expenses. And when a buyer is only shopping the monthly payment, it can be easy to overlook that the monthly expense can be a drag on their budget to the tune of tens of thousands of dollars over several years.
“Once you start talking monthly payments, it breaks down that barrier of going from $30,000 to $35,000,” Drury says. “Because now … it’s just an extra $30 a month, now it’s just an extra $40 a month. With that kind of mentality and extending out term lengths, it makes it a lot more affordable in people’s minds to buy up these expensive vehicles and disregard the actual starting price.”
And once a buyer is actually at the dealership, it can be harder to focus on a sticker price they can afford.
“You walk into a car dealership and it’s sensory overload,” Chaffin says. “The new car smell, you see all these new gadgets. The initial sensory overload … is going to wear off, but the car payment may not.”
In the moment, spending a little more can be easy to justify.
That fixation on the monthly payment is also what pushes buyers toward longer loans, Drury says. And while a longer loan can make a car affordable by lowering the monthly payment, it also means the buyer pays more overall.
On a $50,000 loan at a 7% fixed APR, going from 60 to 84 months saves more than $200 a month while adding roughly $4,000 in interest over the life of the loan.
“At the end of the day, people forget how much interest costs,” Drury says. “When you look at the average amount of interest paid over the life of an auto loan now, it’s something like $10,000. You’re literally just paying for the right to borrow [more].”
Know what kind of car owner you are
An 84-month loan doesn’t necessarily lead to negative equity. But the risk of going underwater increases when the loan lasts longer than the buyer actually keeps the car, a mismatch that is becoming more common, according to Edmunds.
For such a buyer, “you might sign the paperwork for seven years, but I’m pretty sure you’ll be back in five, maybe even three,” Drury says.
Even so, there can be plenty of reasons to want another car before the loan is paid off, says Andrea Anderson, a sales consultant at Andrews Cadillac Brentwood in Tennessee. A buyer might want newer technology or the protection of warranty coverage, need something different as their family changes, or simply prefer a different feature or color.
For buyers who do decide to trade, the decision can be especially easy to justify when the next car comes with roughly the same monthly payment.
But when negative equity is rolled into the next loan, the buyer is financing not only the next car, but also debt left over from the previous one. Anderson says buyers can move from car to car thinking, “‘Oh, well, the payment’s the same,’ and yes, it might be, but the vehicle isn’t worth what they’re paying.”
“They haven’t thought of their loan being extended an extra two to three years … and they just don’t think about the long term,” Anderson says.
Customers who know they want a new car every few years may want to consider a lease instead, Anderson says. A three-year lease may better match their actual buying habits than taking out a six- or seven-year loan they are unlikely to keep until the end. The tradeoff is that the customer doesn’t own the car, but they also aren’t carrying an unpaid loan balance when the lease ends.
Another option, especially for borrowers carrying a lot of negative equity, is to keep the car longer and give themselves more time to close the gap between what they owe and what it’s worth.
“Sometimes my recommendation is keep your vehicle, pay on it for another couple of years,” Letsis says. “That’s the best thing for you.”
Holding onto a car longer can also make financial sense even after the initial warranty expires. Maintenance and repair costs are often still less expensive than replacing the vehicle, according to AAA.
Once the loan is paid off, the owner has more flexibility. They can keep the car and put the money that had gone toward payments toward other goals, such as retirement savings or vacations, says Jeff Judge, a certified financial planner with Chesapeake Financial Planners.
“You just have to weigh what the trade-offs are of carrying that debt longer term,” Judge says. “Me personally, I tend to drive my cars ’til the wheels fall off.”
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