New vehicle sales have continued to look relatively stable this year. Volume has held close to where it stood 12 months ago, and so far, consumer demand and pricing strategies have remained in check through much of the year. But beneath that steady headline, a more consequential shift is building on dealership trade-in lanes, one rooted in decisions consumers made back in 2020 through 2022.
The Debt Nobody Priced In
Nearly a third of new vehicle trade-ins now carry negative equity, marking the largest share of underwater trades in any quarter since early 2021, when supply shortages first pushed buyers into paying over sticker. The average amount owed on those trade-ins has climbed to a record high, a shortfall that has grown by 42% over the past five years. Loan terms have stretched to match. The share of new vehicle buyers signing on for seven-year loans or longer has more than doubled over the past decade, and among buyers who are already underwater, nine in ten are now extending their terms to six years or beyond just to make the payment work.
This certainly didn’t all happen overnight, and ever since the COVID-era shopping phase, many in the industry knew we’d eventually face this scenario.
Between 2020 and 2022, computer chip shortages gutted new vehicle inventory just as demand surged. Dealers had little to sell, and buyers who needed a vehicle often paid $2,000 or more above sticker price to get one. Manufacturer incentives disappeared, used values subsequently spiked, and inflated pricing persisted for two-to-three years after the initial shortage eased.
Those vehicles are now coming back as trade ins. But new vehicle values have normalized while the loans written against 2021 and 2022 sticker prices have not. The result is a generation of buyers, still mid-term on financing from that period, sitting on far more debt than the trade-in cycle has historically produced. A shortfall that once averaged around $3,000 per trade in has widened to roughly $6,000 to $7,000 in many cases, with some buyers carrying $8,000 to $10,000 or more in negative equity.
For consumers, that difference can have a meaningful impact on the monthly payment. Edmunds found that buyers who rolled negative equity into a new loan paid an average of $944 a month in the second quarter, the highest Edmunds has on record. Across all financed new vehicles, the average was $777, so these buyers are paying about $167 more every month. The math behind it is simple enough. Say a customer owes $38,000 on a trade that’s worth about $30,000. That $8,000 still has to be paid, and it usually gets rolled into the next loan. To keep the payment somewhere they can live with, the term usually gets stretched, and they start the new loan underwater before they’ve left the lot.
This is very likely still early. New vehicle finance terms typically run close to seven years, which means the wave of 2020 and 2021 buyers reaching a natural trade in point is only just beginning. Industry conversations suggest dealers may be seeing the first stage of this group so far, with several more years of maturing loans still ahead.
Why It Threatens New Vehicle Sales, Not Just F&I
Negative equity does not stay contained to the finance office. When a trade in carries five figures of debt, that balance gets rolled into the new loan, inflating the amount financed and pushing the monthly payment higher than the vehicle itself would otherwise require. Lenders, wary of financing more than a vehicle is worth, can cap how much negative equity they will approve, effectively pricing some buyers out of the new vehicle they came in to purchase.
For dealers, that pressure shows up as margin compression before a single incentive is even applied. Some dealers report absorbing losses of $5,000 or more per vehicle on aged inventory that has to be discounted to move, then leaning on F&I products to recover what the front-end gave up. That might provide a short-term band-aid, but it won’t solve the larger problem over the next decade.
There is also a longer-term business consideration for dealers. Stretching a customer’s loan to make today’s payment work can delay the next purchase cycle. When 84-month financing becomes the solution, that customer may not return for another vehicle for five years or more, compared with a much shorter replacement cycle when 60-month loans were more common.
A More Deliberate Approach to the Trade-In Conversation
Those dealers best positioned for this cycle are treating trade-in equity as something to manage proactively, not discover at the negotiating table. That starts with identifying which customers in the service drive or the existing customer file are likely carrying meaningful negative equity, based on when and at what price they originally financed, well before those customers walk onto the lot ready to buy.
It also means having a more transparent conversation about the numbers. Rather than folding negative equity quietly into a larger loan, dealers and finance managers who lay out exactly how much debt is being carried forward, and what that means for the new payment, tend to build more trust and close more durable deals. Matching protection products to the actual risk matters too. As loan balances and vehicle values drift further apart, the cost of a total loss claim has risen sharply, with average claim severity climbing by roughly 35% since the last time negative equity spiked this high, which makes appropriately structured gap coverage a genuinely useful tool rather than a routine add on.
Some dealers are also finding relief through structured payment programs, which are designed to ease the payment burden created by negative equity and longer loan terms rather than simply masking it. By building in features such as payment flexibility and retention support, these programs give finance managers another lever to pull when a customer’s trade in numbers do not initially work. For dealers navigating a wave of underwater trade ins, having that kind of structured option available can be the difference between losing a deal and finding a path to close it.
Finally, loan term discipline matters more than it has in years. Every additional year stretched onto a loan slows the pace at which a buyer builds real equity, setting up the next trade in for the same problem. Dealers who push back on unnecessary term extension, even when a longer loan makes today’s payment easier to approve, are doing their future trade-in customers a favor.
The COVID-era pricing shock did not end when supply chains recovered. It is still working its way through millions of auto loans, and it will keep surfacing at the trade in desk for years to come. Dealers who treat that as a data problem to solve early, rather than a negotiation to win late, will be the ones still selling new vehicles comfortably when the rest of this wave arrives.
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