Upside Down Car Loan: What It Means & How To Get Out

When you owe more on your car loan than the car is worth, you’re upside down. You may also hear it called having negative equity or being underwater. You might be facing financial stress if your car gets totaled, stolen, or needs major repairs. Many people end up in negative equity due to long loan terms, high interest rates, small down payments, or rapid depreciation. You have options to fix your situation.

What Does Being Upside Down on a Car Loan Mean?

Being upside down means your loan balance exceeds your car’s current value. You have negative equity in your vehicle. Say you owe $18,000 on your loan but your car is only worth $15,000. You’re upside down by $3,000.

Problems arise when you want to sell the car, trade it in, or if the car is damaged or stolen. Your lender still expects full payment of the loan amount. The car’s condition or worth doesn’t change what you owe.

Why Auto Loans Go Upside Down

Cars lose value quickly through depreciation. Most new cars lose 20% or more of their value in the first year alone. Your loan balance doesn’t drop fast enough to keep pace.

Common reasons you end up with negative equity include:

• You made a small or no down payment
• You chose a long loan term that slows equity building
• You took out a loan with a high interest rate
• You rolled negative equity from a previous loan into your new car loan
• You added features or extras that didn’t raise resale value
• You bought an overpriced car that lost value faster than expected

Accidents or expensive repairs can lower your car’s value even more. If your warranty or insurance won’t cover the cost, the car may be worth much less than what you owe.

How To Tell if You’re Upside Down

Compare your car’s value to your loan payoff amount. Here’s your action plan:

1. Contact your lender and ask for your loan payoff amount
2. Find your car’s current value using tools like Kelley Blue Book or Edmunds
3. Subtract the payoff amount from the car’s value

If the number is negative, you’re upside down on your loan.

What To Do When You’re Upside Down on a Car Loan

You still have options if you’re upside down on your car loan. The right approach depends on whether you want to keep the car or get out of the loan.

Consider these strategies:

• Keep the car and continue making payments
• Make extra car payments to build equity faster
• Refinance your car loan for better terms
• Sell the car privately
• Trade in the car at a dealership
• Use gap insurance if you have it
• Consider bankruptcy for multiple debt problems

Below we examine each option in detail.

Keep the Car and Keep Paying

Stick with it if the car works well and fits your needs. Your loan balance will drop over time. The car’s value will eventually catch up. This works best if the gap between your loan and your car’s value is small.

Make Extra Payments

Extra payments on your loan reduce your balance faster. You can do this regularly or whenever you get extra income. Think bonuses or tax refunds. Extra payments reduce interest and help you build equity more quickly.

Refinance Your Auto Loan

Refinancing means getting a new loan to replace your current one. You might benefit if:

• Interest rates have dropped since your original loan
• Your credit score has improved significantly
• You want to shorten your loan term

Upside down car loan refinance may be harder to qualify for. Some lenders will work with you if the gap isn’t too large. Shop around and ask about loan options that help reduce negative equity. A lower interest rate means lower monthly payments and less interest over time.

Our partner Cambridge Credit Counseling can help you explore debt management strategies that improve your overall financial picture.

Sell the Car

Selling is an option if you want out of the loan. A private sale often brings in more money than trading it in. You’ll still need to pay the lender the full payoff amount. If the sale price doesn’t cover it, you’ll need to cover the difference with savings or a small personal loan.

Talk to your lender before the sale. You need to understand how to handle the title and payment process. Selling an upside down car can work with proper planning.

Trade In Your Car

A dealership may accept your car as a trade-in, even with negative equity. But here’s the catch: They usually roll your negative equity into the new car loan. You’re starting your new vehicle loan already underwater.

You can become trapped in a cycle where you’re always upside down on your next car. If you’re going to trade in, make a larger down payment. Look for trade-in incentives to reduce what you owe.

Use Gap Insurance

Gap insurance covers the difference between your car’s value and your loan balance. It only applies if your car is stolen or totaled. You’re protected from owing money on a car you no longer have.

Gap insurance usually only applies to newer vehicles. It’s sometimes included when financing through a dealership.

Consider Bankruptcy

If your upside down loan is just one of several financial problems, Chapter 7 bankruptcy may be worth exploring. You should especially consider it if you’re missing credit card or medical bill payments. You may also benefit if you have a wage garnishment order against you or you’re facing a debt collection lawsuit.

Depending on your situation, Chapter 7 bankruptcy could help discharge your responsibility for the auto loan. In some cases, you might keep the car with more affordable payments.

How To Avoid Negative Equity in the Future

You can prevent being upside down on your next car loan. Make a larger down payment of at least 20% if possible. Choose shorter loan terms of 48 months or less. Shop around for the lowest interest rate available for your credit score.

Buy a car that holds its value well. Research models with strong resale values. Avoid rolling negative equity into a new loan. Keep your car well-maintained to preserve its value.