(MONEY Magazine) – Credit-card debt was bad enough. Now people are running financial red lights in automobiles. Nearly three in 10 new-car buyers are discovering they're "upside down"--they owe more money on their current cars than they're worth in trade. How'd that happen? Buyers are putting less money down and taking longer-term loans to get classier cars. Not the worst move--until you decide, barely into an epic loan on that Terrorizer XE, that you can't wait another day for the latest Terrorizer XEL. Having built up no real equity, you simply roll the outstanding debt into another car loan. That sucking sound? Ask anyone drowning in credit-card payments.

Used-car values do play a role in all this. They're below traditional levels and remain critical in figuring long-term ownership costs. But they're hardly the culprit behind crushing debt. For one, even owners of Hondas and other top-resale brands can find themselves upside down. And even models with wretched resale values are still worth substantial cash after three or five years. So pay off the loan, regardless of model, and your remaining balance sheet will be black like limousine leather. No debt. An asset owned in full.

The real problem is, people get the new-car itch years before they scratch the old loan. Upside-down buyers are rolling an average $3,700 in old debt into their next car. In California--where even the pool boy seems to drive a BMW--40% of buyers are upside down (and by an average of $4,700). Token down payments make things worse: They've shrunk to 5% from a historical 10% to 15%.

Dealers and lenders enable all this by happily refinancing, say, $3,000 in old debt and writing a loan for the full retail price of $30,000, knowing that the buyer really paid $27,000 post-discount.

Big incentives and endless loans helped cut the average monthly payment to $453 in November, down from $470 a year earlier, even as the price of the average car rose slightly to $25,523. "Consumers are just delaying the time bomb for a couple of years," says Bob Kurilko of auto website Edmunds.com. And this bomb has one long fuse: Nearly 40% of new-car buyers took loans longer than 60 months last fall, up from 24% the year before. The average term now stands at 63 months, but almost 30% of buyers opt for 72 months. Some banks are floating 96-month car loans.

It's hard to avoid the conclusion that too many people are driving Benzes on a Buick budget. So how to avoid denting your financial image?

Hang on to your car until you pay it off. Do that, and you'll never hear "upside down" outside of baking class.

Put at least 10% down on a car; 20% is better. You'll lower the monthlies, build equity and owe less interest.

Limit loans to 36 or 48 months. Your car will still be fresh enough to trade for good money--or to keep for years of no-payment bliss. (While longer loans help you buy more car, don't bite if you are not willing to keep it the full term.)

Consider leasing. At least you will never have to worry about equity.