How to Handle Negative Equity on a Car Loan

What Is Negative Equity?

Negative equity occurs when the outstanding loan balance exceeds the vehicle's current market value. This is also called being 'upside down' or 'underwater' on a car loan.

Sources: Consumer Financial Protection Bureau, Federal Trade Commission, Herrnstein Hyundai

How Negative Equity Occurs

Negative equity builds when a car's value drops faster than the loan balance declines. Common contributing factors include making a small down payment, choosing a long loan term (such as 72 or 84 months), and rapid vehicle depreciation. A new car can lose about 20% of its value in the first year, which often leaves the balance higher than the car's worth for a time.

Sources: Herrnstein Hyundai, Team Kia of Bend

Negative Equity on Trade-Ins

When you trade in a car with negative equity, the difference between the payoff amount and the trade-in value must be paid. Dealers may add that amount to your new loan or take it from your down payment, but you remain responsible for it. This can result in a larger loan amount, higher monthly payment, and a higher interest rate compared to buyers with positive equity or no trade-in.

The Consumer Financial Protection Bureau's report on auto lending data found that, from 2018 to 2022, 11.6% of vehicle loans included negative equity. Those with negative equity had an average loan-to-value ratio of 119.3%, larger loan amounts, and higher monthly payments. They were also more than twice as likely to have their account assigned to repossession within two years compared to those with positive trade-in equity.

Sources: Consumer Financial Protection Bureau, Federal Trade Commission

Options for Managing Negative Equity

There are several ways to address negative equity. One option is to make extra principal payments to reduce the loan balance faster. Another is to sell the car privately, though you'd still owe the difference. Waiting to trade in until equity becomes positive can also work, but that may take time. Refinancing is possible, but lenders typically cap loan-to-value (LTV) ratios between 110% and 125% of the vehicle's value, so you'll need to meet that threshold. Rolling negative equity into a new loan is another possibility, but it increases the amount you finance and may lead to higher costs.

Sources: Federal Trade Commission, Herrnstein Hyundai

Step-by-Step Decision Checklist

To decide how to handle your situation, work through the following steps. They help you compare your options without rushing into a decision.

1. 1. Get your car's current market value using a reliable source like Kelley Blue Book or Edmunds.
2. 2. Check your loan payoff amount—the exact sum needed to pay off the loan today.
3. 3. Calculate your equity: trade-in value minus payoff. If it's negative, that's your negative equity.
4. 4. Assess your budget: can you afford extra payments to reduce the balance faster?
5. 5. Compare your interest rate with current auto loan rates—if yours is higher, refinancing might help, but check your LTV ratio.
6. 6. Consider whether you're planning to keep the car for a while or need to trade in soon. If you can wait, that may lessen negative equity.
7. 7. If you do trade in, understand exactly how the dealer will handle the negative equity—whether it's added to the new loan or taken from your down payment.
8. 8. Before you sign, review all paperwork to ensure the negative equity is clearly disclosed.

Sources: Federal Trade Commission, Herrnstein Hyundai

Frequently Asked Questions

Find answers to common questions about negative equity and car loans.

• Can you finance negative equity into a new car loan?
• How much negative equity can you roll over into a new loan?
• Is it better to wait or trade in a car with negative equity?
• Does refinancing help with negative equity?
• What is the quickest way to get out of negative equity?