Can You Trade In Your Car If You Have Negative Equity?
Car loans have always been a common source of financial stress for people who are not so wealthy that they can afford to pay for a car in a lump sum instead of financing it, but if it seems like auto loans are becoming more financially perilous, it is not just your imagination. The worst-case scenario, with repayment terms of seven years and monthly payments of $1,000 or more have become the new normal. A near record number of car owners have negative equity in their cars, which means that the amount they owe on the car is more than its resale value; this is also known as an underwater car loan. In the last quarter of 2025, 29 percent of cars that consumers traded in to buy new cars had negative equity; the only quarter when this was higher was at the end of 2021. Many of these distressed car loans date from the pandemic days of computer chip shortages, when new cars were in such short supply that buyers had to pay thousands of dollars above the manufacturer’s suggested retail price. Your car might be such an albatross around your neck that you are considering trading it in, but since you have negative equity, will trading it in even solve the problem? For help strategizing about what to do about your underwater car loan, contact a Philadelphia debt relief lawyer.
Your Options for Coping With an Underwater Car Loan
It is possible to trade in your car at the dealership even if you have negative equity, but you will still be responsible for paying the difference between the car’s value and the amount you owe. For example, if the car’s resale value is $7,000, but the loan balance is $9,000, you will owe $2,000 after the dealer buys back your car. If you have $2,000 to spare, the problem is solved. In fact, this is the simplest solution to your problem if your household has two cars and two car loans and have decided that you can only afford one.
If your car is old enough to cause you problems, so you want to trade it in, but your loan is underwater, the dealer will still accept the trade in. This is risky, though. You can add the negative equity amount, the $2,000 in the above example, to your new car loan. This will mean that, even if your new loan has a long repayment term, your monthly payments will be high. It also means that you will be at risk of getting back into negative equity territory, because it will be a longer time before your monthly payments pay down a substantial amount of the principal on the new loan.
Contact CONSUMERLAWPA.com About Underwater Car Loans
A Philadelphia consumer law attorney can help you if you want to trade in your car, but you have negative equity. Contact CONSUMERLAWPA.com to set up a free, confidential consultation.
Source:
cnbc.com/2026/01/15/underwater-car-trade-ins.html
