What to do if you're underwater on your car loan

More car buyers are finding themselves in a tough spot financially. According to a recent report from Edmunds, more than 26% of new-vehicle trade-ins in the second quarter of 2025 had negative equity — the highest share in more than four years.

Negative equity refers to a situation in which you owe more on your vehicle than it’s worth, leaving you “upside down” or “underwater” on your loan. Negative equity is an acute problem when you trade that vehicle for another new one because you’ll have to pay off what you owe while simultaneously taking on the new loan payments. The average amount owed on these upside-down loans was $6,754, underscoring the mounting risks of car debt in today’s market.

“Consumers being underwater on their car loans isn’t a new trend, but the stakes are higher than ever in today’s financial landscape,” said Ivan Drury, Edmunds’ director of insights. “Affordability pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan.”

In other words, ending up upside down on your loan is becoming easier than ever. But you can take steps to avoid the worst of negative equity.

If you’re already upside down, the simplest way to avoid digging a deeper financial hole is to hold on to your current vehicle and keep making payments. Time and patience are often your best allies. Every payment you make lowers the balance, while depreciation on your vehicle decreases after the first few years. Eventually, the loan balance will fall below the vehicle’s value.

This strategy requires discipline and the ability to resist the temptation to trade into something newer. But it will help you avoid spending money you don’t have to. According to Edmunds’ data, buyers who had negative equity on their current vehicle and rolled it into a new vehicle loan paid an average $915 per month, compared to an industry average of $756. They also financed $12,145 more than the typical new-vehicle buyer.

Hanging onto your current car until the balance catches up may not be exciting, but it’s often the surest way to avoid multiplying your debt.

Refinancing can sometimes soften the blow of negative equity. If your credit has improved or interest rates are lower than when you first financed, a new loan might reduce your monthly payment and buy you time to catch up.

Another option is to lease your next vehicle rather than finance its purchase. You will still have to pay higher-than-typical monthly payments because you’ll be paying off your current vehicle’s negative equity along with your new vehicle’s lease payments. At the end of the lease, you are no longer upside down, and you’ll be walking away from your vehicle when the lease ends. But therein lies the rub. You won’t have a vehicle to use as a trade-in toward your next purchase. You can either lease again or finance your next new or used car purchase.

The best solution is prevention. Edmunds experts note that buying a brand-new car often puts you in a depreciation hole the second you drive off the lot. A new car typically loses about 20% of its value within the first year, meaning even a modest loan can leave you owing more than the car is worth if you don’t make a big down payment. The solution? Buy used.

Buying a used vehicle helps you avoid the worst of depreciation. A 2- or 3-year-old vehicle will still have plenty of life in it, and it should still have warranty coverage. If peace of mind is important, consider buying a certified pre-owned vehicle. These vehicles must pass a dealership inspection and typically come backed by an extended warranty. This strategy helps minimize the risk of being underwater a year or two down the road.

Another key step is to make a larger down payment. Edmunds recommends aiming for at least 20% down. That cushion will help your loan balance shrink quicker than the car’s value, giving you positive equity sooner.

Finally, avoid ultra-long loan terms. It’s tempting to stretch financing to 72 or even 84 months to lower the monthly payment. But doing so keeps you upside down longer. A 60-month loan or shorter, while more expensive monthly, is much safer financially.

Being underwater on a car loan isn’t catastrophic, but it does require discipline to escape. The first step is prevention: Buy smart, make a solid down payment, and avoid an overly long loan. If you’re already upside down, your best option is usually to keep the car until you regain equity.

This story was provided to The Associated Press by the automotive website Edmunds. Josh Jacquot is a contributor at Edmunds.

FILE - Unsold 2025 Gladiator pickup trucks sit on display outside a Jeep dealership Friday, Sept. 26, 2025, in Englewood, Colo. (AP Photo/David Zalubowski, File)

ANCHORAGE, Alaska (AP) — A state appeals court is being asked to dismiss felony voter misconduct charges against an Alaska resident born in American Samoa, one of numerous cases that have drawn attention to the complex citizenship status of people born in the U.S. territory.

In arguments Thursday, attorneys for Tupe Smith plan to ask the Alaska Court of Appeals in Anchorage to reverse a lower court's decision that let stand the indictment brought against her. Her supporters say she made an innocent mistake that does not merit charges, but the state contends Smith falsely and deliberately claimed citizenship.

Prosecutors also have brought charges against 10 other people from American Samoa in the small Alaska community of Whittier, including Smith’s husband and her mother-in-law. American Samoa is the only U.S. territory where residents are not automatically granted citizenship by being born on American soil and instead are considered U.S. nationals. Paths to citizenship exist, such as naturalization, though that process can be expensive and cumbersome.

American Samoans can serve in the military, obtain U.S. passports and vote in elections in American Samoa, but they cannot hold public office in the U.S. or participate in most U.S. elections.

About 25 people gathered on a snowy street outside the courthouse before Thursday's hearing to support Smith. One woman, Fran Seager of Palmer, held a sign that said, “Support our Samoans. They are US nationals.”

Smith's husband, Michael Pese, thanked the American Samoa community in the Anchorage area. “If it wasn’t for you guys, I wouldn’t be strong enough to face this head on,” he said.

State Sen. Forrest Dunbar, a Democrat who attended the rally, said the Alaska Department of Law has limited resources.

“We should be going after people who are genuine criminals, who are violent criminals, or at least have the intent to deceive,” he said. “I do not think it is a good use of our limited state resources to go after these hardworking, taxpaying Alaskans who are not criminals.”

Smith was arrested after winning election to a regional school board in 2023. She said she relied on erroneous information from local election officials when she identified herself as a U.S. citizen on voter registration forms.

In a court filing in 2024, one of her previous attorneys said that when Smith answered questions from the Alaska state trooper who arrested her, she said she was aware that she could not vote in presidential elections but was “unaware of any other restrictions on her ability to vote.”

Smith said she marks herself as a U.S. national on paperwork. But when there was no such option on voter registration forms, she was told by city representatives that it was appropriate to mark U.S. citizen, according to the filing.

Smith “exercised what she believed was her right to vote in a local election. She did so without any intent to mislead or deceive anyone,” her current attorneys said in a filing in September. “Her belief that U.S. nationals may vote in local elections, which was supported by advice from City of Whittier election officials, was simply mistaken.”

The state has said Smith falsely and deliberately claimed citizenship. Prosecutors pointed to the language on the voter application forms she filled out in 2020 and 2022, which explicitly said that if the applicant was not at least 18 years old and a U.S. citizen, “do not complete this form, as you are not eligible to vote.”

The counts Smith was indicted on “did not have anything to do with her belief in her ability to vote in certain elections; rather they concerned the straightforward question of whether or not Smith intentionally and falsely swore she was a United States citizen,” Kayla Doyle, an assistant attorney general, said in court filings last year.

One of Smith's attorneys, Neil Weare, co-founder of the Washington-based Right to Democracy Project, said by email last week that if the appeals court lets stand the indictment, Alaska will be “the only state to our knowledge with such a low bar for felony voter fraud.”

Bohrer reported from Juneau, Alaska.

Michael Pese and his wife, Tupe Smith, stand outside the Boney Courthouse in Anchorage, Alaska, Thursday, Jan. 15, 2026, ahead of the Alaska Court of Appeals hearing a challenge to the voter fraud case brought against her by the state. (AP Photo/Mark Thiessen)

Michael Pese, left, his wife, Tupe Smith, and their son Maximus pose for a photo outside the Boney Courthouse in Anchorage, Alaska, Thursday, Jan. 15, 2026, ahead of the Alaska Court of Appeals hearing a challenge to the voter fraud case brought against her by the state. (AP Photo/Mark Thiessen)

FILE - Tupe Smith poses for a photo outside the school in Whittier, Alaska, May 13, 2025. (AP Photo/Mark Thiessen, File)