By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panel consensus is that the auto lending sector faces significant risks, primarily due to consumers' increasing reliance on long-term loans and negative equity, which could lead to a spike in delinquencies and threaten the stability of subprime auto-backed securities.
Risk: Systemic fragility of subprime auto-backed securities (ABS) due to potential normalization of used car prices and increased delinquency rates.
Opportunity: None identified.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
American drivers are falling into a costly buying habit as the average price of a new car approaches $50,000
Chase Kell
6 min read
With the average cost of a new vehicle approaching $50,000, car buyers have been searching for ways to keep their monthly payments down.
Unfortunately, one of the most popular hacks — stretching car loan terms to six years or longer to knock a few dollars off of monthly payments — could end up costing drivers thousands of dollars in the long run.
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Here's a look at how this strategy may be a losing proposition, along with some ways to reduce the losses.
31% of vehicle trade-ins carry negative equity
As MarketWatch reports, nearly a third of vehicle trade-ins (31%) now carry negative equity, which means the amount owed on the loan exceeds the vehicle's market value (1). That's a five-year high, as the value of used cars has leveled off from its pandemic-era spike.
The average trade-in that's underwater now comes with $7,183 in negative equity, according to Edmunds (2). Vehicle depreciation is often to blame, but long-term loans and small down payments can also play a part.
According to JD Power, long-term loans accounted for more than half of car sales in March 2026, with 72-month loans representing 40.5% and 84-month loans representing 12.8% (3).
"One of the side effects of this is that equity in the vehicle builds more slowly," Michael Sommer, founder of Alaminos Wealth Planning, shared with MarketWatch (4).
For those who often trade in their cars every three or four years, this slow-building equity can be costly.
"It's just not something you can dig your way out of unless you pay off the entire car," Ivan Drury, director of insights at Edmunds, told MarketWatch when discussing long-term loans.
It's worse for car buyers who drove away with new wheels in 2022, when pandemic-era supply-chain issues forced them to pay more than the retail price. If they trade in their cars now, many could face a bigger decline in their car's value due to the higher price they paid upfront.
"It's a risk, especially when consumers roll over that amount into the loan for their next car, which makes the negative-equity problem worse by making the new loan larger," MarketWatch reports.
This is a problem that often hits people who are dealing with negative equity in other areas of their life, as well.
According to the the Consumer Financial Protection Bureau, vehicle owners who roll negative equity over into a new car loan often have "lower credit scores, lower household income, longer loan terms and [are] more likely to have a co-borrower than consumers with no trade-in or a positive-equity trade-in."
How to mitigate negative equity
According to Go Auto, most vehicles lose 50% to 60% of value in just five years and can lose as much as 11% the moment they're driven off of the dealership lot (5).
Thankfully, there are a few things that drivers can do to avoid trading in a vehicle with negative equity. The first two tips involve being proactive when you buy a car.
Short-term loans
If you can afford the monthly payments, opting for a 60-month loan will allow you to pay off the debt in five years, which is right around the time the vehicle will have lost much of its value. This will allow you to trade in the vehicle without negative equity, as your loan has been fully paid.
It also reduces the amount of interest you buy, since at the beginning of a loan term, most of the money from the monthly payments goes towards the interest and not the principal.
Purchase cars that maintain their value
One great way to mitigate negative equity is to buy cars that generally retain their value. According to Kelley Blue Book, here are the top five cars, trucks and SUVs that have the best resale value in 2026 (6):
2026 Toyota Tacoma: 63% after five years
2026 Toyota Tundra: 59.9%
2026 Toyota 4Runner: 58%
2026 Toyota GR Supra: 56%
2026 Mercedes-Benz G-Class: 55%
If you already have a car that may be underwater, here are two more tips to mitigate your losses.
Hold on to your vehicle
One sound financial strategy that helps mitigate the high depreciation and interest costs of a long-term loan is to keep the car for longer than half of the loan's term. This means a car owner with a 72-month loan would be wise to keep the car for at least four years, while an owner with an 84-month loan should keep the car for at least five.
This will allow a long-term loan holder to pay off a large chunk of the debt as the vehicle loses value, which could help with limiting negative equity once the owner decides to sell or trade in.
As Tyson Jominy of JD Power explained to MarketWatch, a car owner with $2,000 of negative equity might want to consider holding on to the car for another six months to a year, which might allow the owner to break even on their loan.
Use cash incentives to offset negative equity
Many car companies offer incentives that can help trade-in customers with offsetting negative equity. In fact, certain companies may offer more with their incentives because their vehicles tend to depreciate quicker.
"They structure their incentives to meet their customers where they are," Jominy told MarketWatch.
Four leading AI models discuss this article
"The reliance on extended-term loans to mask vehicle affordability issues creates a systemic credit risk that will materialize as used car depreciation accelerates."
The narrative of 'consumer over-leveraging' is well-worn, but it misses the structural shift in auto finance. We are seeing a bifurcation: manufacturers like Toyota (TM) are successfully using high residual values to subsidize affordability, while others are masking poor demand with extended 84-month terms. The real risk isn't just negative equity; it's the systemic fragility of subprime auto-backed securities (ABS). If used car prices continue to normalize downward, the 'roll-over' strategy will collapse, forcing a spike in delinquency rates. This isn't just a personal finance issue; it’s a looming credit event for lenders like Ally Financial (ALLY) and Capital One (COF) that rely on high-interest, long-term loan portfolios.
Long-term loans are a rational response to high interest rates and vehicle costs, potentially keeping the automotive sector afloat by maintaining sales volumes that would otherwise evaporate.
"Rolling $7k avg negative equity into new $50k loans amid long terms creates a principal snowball, heightening default risk for subprime-heavy auto lenders."
Article flags a debt trap: 31% of trade-ins underwater by $7,183 avg (Edmunds), fueled by 72mo (40.5%) and 84mo (12.8%) loans dominating 53%+ of March sales (JD Power), with buyers rolling neg equity into pricier new loans at ~$50k ASPs. CFPB ties this to lower-credit, low-income profiles, amplifying risks. Bearish for auto lenders like ALLY and CACC, as slow equity build (per experts) + depreciation (50-60% in 5yrs) balloons loan-to-value ratios, priming delinquencies if used prices stall or economy softens. Misses rate context: avg 7%+ APRs compound costs over long terms.
Fed rate cuts could enable refinancing into shorter/cheaper terms, easing burdens; strong wage growth (4%+ YoY) and low repossessions sustain payments despite neg equity.
"The real risk is the *rollover cycle*, not the extended loan term itself—and the article conflates a sunk-cost problem (2022 overpayment) with an ongoing behavioral trap that only materializes if consumers repeatedly trade in underwater vehicles."
The article conflates two separate problems: (1) structural negative equity from 2022 pandemic-era overpayment, which is a sunk cost and self-correcting as those cars age out of the fleet, and (2) the behavioral choice to extend loan terms, which is rational given $50k average prices and stagnant real wages. The real risk isn't the strategy itself—it's the *rollover* behavior: consumers perpetually trading every 3-4 years while rolling negative equity forward. This creates a debt treadmill, not a one-time mistake. The article also omits that used-car prices have stabilized post-pandemic, reducing *future* depreciation shocks. The CFPB data on negative-equity borrowers (lower credit scores, lower income) suggests this is less a 'costly habit' and more a symptom of constrained purchasing power.
If used-car prices stabilize or appreciate modestly, and consumers hold vehicles longer (as the article suggests), negative equity naturally resolves without intervention. The 'problem' may be self-limiting rather than systemic.
"Long-term auto loans with underwater equity pose material downside risk to consumer balance sheets if used-car prices decline or unemployment rises, potentially translating into higher losses for auto lenders."
Rising average new-car prices toward $50k and the spread of 60–84 month loans highlight a consumer-leverage risk in auto financing. The piece warns that longer terms and negative equity can cost buyers thousands and depress equity-building on trade-ins. That’s a credible downside scenario for households and for lenders if used-car values weaken or the job market deteriorates. But the article understates that auto-loan performance has remained resilient amid rate shocks, and lenders can price risk or tighten credit. Missing context includes who’s taking these loans (credit score, income), the role of leases, and whether higher sticker prices simply shift tenure without worsening loss rates.
Underwater equity does not automatically translate into higher defaults; lenders can price in risk and use securitization and stricter underwriting, and a resilient labor market could keep losses tame even with longer tenors.
"The auto industry is structurally dependent on the debt-rollover treadmill, making a correction in consumer behavior a catastrophic risk for OEM sales volumes."
Claude, you’re too optimistic about 'self-limiting' risks. The debt treadmill isn't just a behavioral choice; it’s a structural dependency for OEMs like Ford (F) and GM (GM). If consumers stop rolling equity, new car sales volume collapses instantly. We aren't looking at a simple credit cycle; we are looking at a permanent impairment of consumer balance sheets where the 'trade-in' is now a debt-refinancing vehicle rather than an asset liquidation. That’s a systemic risk to auto-ABS liquidity.
"Rising lease share (~30%) protects OEM sales volume from consumer rollover risks, concentrating pain on non-captive lenders."
Gemini, your OEM dependency point overlooks lease penetration, now ~30% of sales (per Edmunds), which bypasses consumer equity issues entirely—captives like GM Financial absorb residuals without rollover debt traps. This insulates volume for F/GM better than you imply, shifting risk squarely to non-captive lenders like ALLY/COF. True systemic threat is ABS desecuritization if subprime delinquencies tick above 5%.
"Captive lenders' residual-value risk may pose a larger systemic threat to OEMs than non-captive subprime ABS delinquencies."
Grok's lease penetration point is sharp, but understates captive lender risk. GM Financial and Ford Credit aren't insulated—they're *exposed* to residual value collapse. If used-car prices weaken, captives absorb losses on off-lease inventory faster than non-captives can reprice. The real systemic risk isn't ABS delinquency alone; it's captive lenders forced to liquidate used-car portfolios into a soft market, cascading losses back to parent OEMs' balance sheets.
"Lease-related residual risk concentrates losses in captive lenders, which can cascade into OEM earnings and auto-ABS liquidity even if non-captives appear resilient."
Grok, your lease-point is insightful, but it deflects current fragility: it shifts risk from consumers to captives. If residuals fall, captive lenders like GM Financial and Ford Credit take losses sooner, compressing OEM earnings and potentially widening securitization spreads when funding turns tight. That cascading effect can undermine auto ABS liquidity even if non-captives seem fine today, making the 'cushion' from leases more of a lever for OEMs than a shield.
The panel consensus is that the auto lending sector faces significant risks, primarily due to consumers' increasing reliance on long-term loans and negative equity, which could lead to a spike in delinquencies and threaten the stability of subprime auto-backed securities.
None identified.
Systemic fragility of subprime auto-backed securities (ABS) due to potential normalization of used car prices and increased delinquency rates.