Buying a car has never been more expensive and for many financing is the only way to get one. While having a car is essential for work, family and daily life, the real challenge is to not let car ownership become a financial burden. 

Getting the cheapest car that meets your needs, financing it for the shortest term and driving it as long as you can is the smartest way to minimize costs. But many consumers are doing it differently and the consequences are big. 

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The Rising Tide of Negative Equity

According to Edmunds, the latest data shows a concerning trend in car financing. In the fourth quarter of 2024, approximately 24.9% of the trade-ins for new car purchases were in negative equity, compared to 20.4% in the same quarter of 2023.

The average negative amount on the upside-down loans was a record $6,838, surpassing the record of $6,458 established in the third quarter of 2024. Notably, 24.6% of consumers with negative equity owed more than $10,000 on their auto loans during this period.

EV owners were hit the hardest, with 54% underwater in Q4 2024 vs 46% in Q3 2024. This is due to rapid EV depreciation and high purchase prices, according to CarEdge.

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And to make matters worse, many consumers are trading in relatively new vehicles – sometimes just a few years old – before paying off their existing loans. This perpetuates the debt cycle and makes it hard to allocate funds towards other financial goals like retirement savings, credit card debt repayment or a down payment on a house.

Car ownership costs go beyond the purchase price. New vehicle average monthly payments were $754 in Q4 2024 and used vehicles $533, according to Edmunds. These big payments can kill your budget and prevent you from saving or investing for long term financial security.

Not all experts agree that trading in a financed vehicle is always a bad idea. Car and Driver says trading in a financed car can be good under certain circumstances especially if the vehicle has high maintenance costs or if a dealership offers incentives that help offset negative equity. 

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Some argue that consolidating an outstanding balance into a new loan can help consumers manage payments better, though it does add to the overall loan balance. Financial experts say you need to evaluate your individual situation before making big financial decisions. 

On the "Dave Ramsey Show," debt elimination expert Jade Warshaw  advised a single mom to sell her car privately rather than trade it in, allowing her to pay down her debt more before her baby arrives. 

In another case, a woman who financed a $20,000 Toyota SUV was urged by her husband to pay off the loan immediately. However, experts advised her to first consider potential prepayment penalties and the impact on her credit score before making a decision, MarketWatch reported.

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