How can I minimize the chance of being upside down on a car loan?

When shopping, consider whether you really can afford the model you want to buy. If it’s necessary to take out a six-year loan to afford the monthly payment, it may be wise to choose a less expensive ride, said Mr. Giorgianni of Consumer Reports.

A rule of thumb is 20-4-10: Put at least 20 percent down in the form of cash or a trade-in, finance the car with a loan of no more than four years and make sure the monthly expenses, including the car payment and insurance costs, are no more than 10 percent of your gross income. If you can’t abide by that rule, Mr. Giorgianni said, “then you can’t afford the car.”

Mr. Montoya of Edmunds suggests taking more than a single, short test drive before settling on a car to reduce the chance of buying an unsuitable model that you will want to trade in when you’re more likely to be upside down.

He recalled a very tall shopper who traded in his small car soon after purchasing it. He was simply too cramped driving it each day. Do your research, Mr. Montoya said, and consider how you will need to use the car over time.

How can I calculate the cost of an upside-down trade-in, when taking out a new loan? offers a negative equity calculator on its website.

How can I be sure I am treated fairly when trading in an upside-down car?

The Federal Trade Commission warns consumers to be especially careful when trading in a car with negative equity. Some dealerships may advertise that they will pay off your old car loan if you buy a new car from them. But if your trade-in has negative equity, the dealer may quietly roll the shortage into your new loan.

Read your purchase contract closely. If you suspect you have been deceived, file a complaint with the Federal Trade Commission, or with your state attorney general’s office.

Article from The New York Times