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As the market corrects from pandemic-era highs, car values are depreciating faster. We are hearing more about “negative equity” used car trade ins. A negative equity car trade-in is when you trade in a vehicle that you owe more on than it is currently worth. This is also called being "upside down" on the loan. It’s usually still possible to trade in your old car, but the dealer will likely have to pay off the old loan and roll the remaining debt into your new car loan, which can result in higher monthly payments and a longer loan term.
Negative equity trade ins are currently more common with EVs compared to gas cars. This is primarily due to the rapid depreciation of EVs, driven by fast-evolving technology, and sometimes lower resale demand for used models.
Negative equity EV trade ins have become a huge point of discussion on social media. Here’s a long thread on Reddit with some insightful and helpful comments.
“I wasn't going to buy one, but Tesla, for some reason, gave me a better deal on my car than Carvana.
Traded in my 2024 Model Y for the Juniper. Tesla gave a generous trade in offer. I have negative equity still but Tesla was able to include it in my financing and I only have to pay $60 extra a month over my usual car payment. Zero due at signing too. I feel it's a good deal with the improvements you are getting on Juniper. Didn't think I was going to get a new car yesterday, but I went in at 4pm and was driving a new car by 7:30pm.”
medium-rareform responded with a helpful comment about tax savings with trade in versus selling:
“One very important thing to keep in mind is tax savings by trading at Tesla as opposed to selling at Carvana then buying at tesla.
In NY sales tax is 8.625%, so here a $20,300 trade-in value from tesla saves ~$1,725 in sales tax on the new purchase. Even though Carvana is offering more, the tax savings make it about a $1k difference (unless you would also purchase something from Carvana of course). That’s similar to the math from my trade-in, so between the hassle and uber costs, I left a few hundo on the table and just let tesla deal with it, and was a super smooth trade / purchase experience.”
Lurkingtonbear added a comment about trading in a new car too soon versus being frugal and driving it longer:
“There’s nothing about Juniper that makes trading in a one year old car with negative equity worth doing. People really make these kind of choices and then advertise it to the rest of us like we don’t know they’re going to be calling into Dave Ramsey and asking for help in 3 years.”
Understanding Negative Equity
Negative equity happens when you owe more on your car loan than the vehicle’s current value. It is sometimes called being upside down, underwater, or buried. For example, if your car loan balance is $20,000 but the car’s market value is only $15,000, you have $5,000 in negative equity. This situation has been common in the car business for years, as vehicles often depreciate faster than people can pay them off.
Why Negative Equity Happens
The main cause of negative equity is the difference between how quickly cars lose value and how slowly loans are paid down. Longer loan terms, like 72 or 84 months, make it easy for buyers to get into newer vehicles but increase the risk of being upside down early in the loan. Many buyers trade cars out of boredom or to get the newest model rather than because their car no longer meets their needs, which worsens the problem.
How to Avoid Negative Equity
The best way to avoid negative equity is to buy used cars. Have you ever heard folks say that, “they don’t build things the way they used to?” Well it’s true when it comes to cars. Today’s automobiles are much more reliable than past generations. On average, a car in the U.S. lasts around 200,000 miles with proper maintenance. Also, new cars in the U.S. depreciate by approximately 40% in the first three years. The largest drop happens in the first year, which can be around 20%, with an additional 15-20% depreciation over the next two years. This all adds up to the fact that the best way to avoid negative equity is to only buy used cars.
Another great way to avoid negative equity is to hold on to your car for the full loan term, ideally five or six years. Once the loan is paid off, the car becomes an asset rather than a liability. During the time you are payment-free, setting aside the equivalent of a monthly payment into savings can build a healthy down payment for your next purchase. Another important step is to put money down when buying a car. Financing 100% of the vehicle, including taxes, fees, and extras, almost guarantees negative equity from the start.
The Role of Market Conditions
Recent years have seen unusual price swings in both new and used cars. High prices, low supply, and rising interest rates have created more severe negative equity cases. The story of a customer trading a 2022 BMW X3 for a Tesla Model Y Juniper shows how quickly values can shift. Despite the BMW being in excellent condition, the customer was about $10,000 upside down because they had bought during peak pricing, financed nearly the full amount, and added extras like an extended warranty.
Smart Financial Strategies
If you are already in a negative equity position, there are several ways to reduce the damage. Making extra payments on your loan helps pay down the principal faster and saves interest. Even small additional payments can make a noticeable difference over time. Cancelling unused service contracts can also bring a refund later, though not immediately. The key is to focus on paying down the loan balance before trading or upgrading.
Dealing with Negative Equity During a Trade
If you must replace your vehicle before the loan is paid off, rolling the negative equity into a new loan is possible, but it worsens the long-term situation. A better option might be to roll it into a lease. While this does not eliminate the negative equity, it keeps it contained within a fixed term, usually 36 to 48 months, rather than carrying it into future purchases. Leasing can be especially practical for those who like driving newer cars every few years.
Living Within Your Means
The most important takeaway is to buy within your financial comfort zone. Choose new models that fit your budget and resist the temptation to overextend for luxury features or top trims. Buying a certified pre-owned or slightly used vehicle can provide modern features and reliability without the steep initial depreciation. Living within your means allows you to enjoy your vehicle without financial stress or the lingering problem of negative equity.
Bottom Line
Negative equity has always been part of the car-buying world, but with smart decisions it can be minimized or avoided. Strongly consider buying a used vehicle. If buying new, keep your car for its full term, make a down payment, pay extra toward principal when possible, and avoid unnecessary upgrades. Leasing can work for those who frequently trade, while saving and planning ahead benefits everyone. By approaching each purchase with patience and discipline, you can stay in control of your finances and drive with peace of mind.
What Do You Think?
Have you ever traded in an electric vehicle that had negative equity? How did the dealer handle it?
Why do you think EVs are depreciating faster than gas cars right now?
Chris Johnston is the author of SAE’s comprehensive book on electric vehicles, "The Arrival of The Electric Car." His coverage on Torque News focuses on electric vehicles. Chris has decades of product management experience in telematics, mobile computing, and wireless communications. Chris has a B.S. in electrical engineering from Purdue University and an MBA. He lives in Seattle. When not working, Chris enjoys restoring classic wooden boats, open water swimming, cycling and flying (as a private pilot). You can connect with Chris on LinkedIn and follow his work on X at ChrisJohnstonEV.
Photo Credit: Tesla media kit
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