Negative Equity: Upside Down on a Car Loan

What is negative equity?

Negative equity refers to a situation where you owe more on a car than the car is worth, leaving you "upside down" or "underwater" on your loan. This continues to be a growing problem, as has the amount of negative equity that owners have in their cars. If you're upside down with negative equity, we've got some tips to help you fix the situation. But first, let's take a look at how this happens.

New cars lose a sizable chunk of value in the first few years of ownership. That loss in value occurs so quickly and can be so substantial that, without a significant down payment to offset the immediate depreciation, it already puts you in an upside-down position. And due to the way loans are structured, most payments go toward paying off the interest charges, not the main balance. It can take years of regular payments to reduce your loan balance enough to match the car's value. And with today's long loan terms, hitting that break-even point takes longer than ever.

Here's a quick example: Let's say you have $15,000 worth of car payments to make on a car that is only worth about $10,000 (usually due to new car depreciation and other market volatilities). That means you are $5,000 upside down. If, at that moment, you decide to trade in this car and buy a new one, you will have to pay the price of the new car plus the $5,000 you owe on the current car. You may see advertisements from dealerships that will pay off your trade no matter what you owe. But that doesn't mean the dealership won't pass the negative equity back to you. You may be able to pay off the negative equity in a lump-sum payment to the dealer, but if you don't want to or can't do that, you can expect that your monthly payments will be much higher because you're rolling over what you owe on your old car to the loan on your new one. Now you're really upside down.

Jump to:

• How bad is it?
• How do people get upside down on their car loan?
• How to get right side up on your car loan
• Loan payoff vs. down payment

How bad is it?

A recent Edmunds report shows that more than one in four (26.6%) new vehicle trade-ins were underwater in the second quarter (Q2) of 2025. This figure was up from 23.9% in Q2 2024 but still far from the record high of 31.9% in Q1 2021. Negative equity balances also increased in Q2, with the average amount owed on upside-down loans being $6,754, up from $6,255 in 2024. Among car shoppers who were trading in their old vehicles to buy a new one:

• 32.6% of their trade-ins carried between $5,000 and $10,000 in negative equity in Q2 of 2025.
• 23.4% owed more than $10,000.
• 7.7% owed more than $15,000.

How do people get upside down on their car loan?

There are several reasons why a person might have negative equity on their car loan. Let's say you bought a car a few years ago at the height of the pandemic vehicle shortage, when cars were being marked up and sold over MSRP. Those cars were immediately upside down in value.  Or perhaps you're welcoming a new addition to your family, and the compact sedan you bought won't be as cargo and car seat-friendly as an SUV. Maybe your employment situation changed unexpectedly, or you bought a car that turned out to be more expensive than you can afford and you can't keep up with the monthly payments. Or maybe you just got tired of your car after a couple of years. The circumstances may differ, but they put you in the same place: You're trying to get out of a car loan before it is paid off.

According to Edmunds' data, the average age of a car that's traded in to a dealership is right around 4 years. The problem is that the average loan term for a new car is closer to 6 years. Those figures go a long way toward explaining why so many buyers struggle with negative equity. 

If the negative equity you carry over to the new car is minimal, then it won't be a terrible burden to bear. But it gets very painful when you carry negative equity over from car to car. The debt gets bigger and bigger, like a snowball rolling downhill.

How to get right side up on your car loan

There is no silver bullet that will magically get rid of negative equity. Your only choice is to deal with the situation either now or later. Here's how:

Option 1: Stick with your current car: You probably don't want to hear this, but the best strategy for getting above water is to scrap plans for a new car and stay with the one you have. You'll need to keep it at least until you reach a break-even point in the loan. Your goal is to reach a point where the value of the car outweighs the amount you owe.

If you've brought negative equity from a previous car to your current loan, you might never break even, at which point paying off the loan outright is your only recourse.

If your budget allows, make larger monthly payments to get above water faster. You might also consider refinancing the loan. Refinancing will lower the interest rate and bring down the monthly payments.

Option 2: Roll the balance into a new car loan (not ideal): This is the most common method that people use because it doesn't cost them anything out of pocket. The dealership will roll over what you owe on the trade-in vehicle into the new car's loan. It offers a convenient way to buy the new car, but your monthly payments will be higher, and the loan will cost more in the long run. More importantly, it immediately saddles your new loan with negative equity.

You will be paying interest not only on the new loan but also on the balance of what you owe on the previous car. The average annual percentage rate, or APR, was 7.3% for new cars and 10.9% for used cars in June 2025. Those are much higher than the average APRs from a few years ago. The higher the interest rate, the higher your payment will be.

Incentives could reduce that balance or even potentially erase the negative equity. For example, if a person was $3,000 upside down on the trade-in car and wanted to buy a new car that had a $4,000 rebate, the buyer could erase the negative equity and still have $1,000 for a down payment on the new car.

Note, however, that cars with heavy incentives tend to be comparatively unpopular models and often have lower resale value for several years, according to Edmunds pricing analysts. This means that if you still owe a substantial balance after incentives, there's a good chance you will be upside down for a longer period. In other words, it will take more time for this car to be available as a free-and-clear trade-in.

Option 3: Roll the debt into a new car lease: An alternate strategy is to lease the car rather than finance the purchase of it. The approach is largely the same: You trade in your car that has an outstanding loan balance. The balance is factored into the lease. You will still deal with higher-than-typical monthly payments, but at the end of the lease (typically three years), you are no longer upside down. If you qualify for a lease special with a low monthly payment, such as the $299 or less deals that are often available with varying down payments, it can soften the blow of carrying along the negative equity. You won't have to worry about any of the resale value issues since the car goes back to the dealership at the end of the lease.

But therein lies the rub. You don't have a car to use as a trade-in toward your next purchase. Your options are to lease again or finance your next new or used car purchase.

Loan payoff vs. down payment

You might be wondering about this scenario: Assume you have set aside some money for a down payment on a new car. Could you use that cash to pay off the loan on the "underwater" car and buy the new car without a down payment? We ran the numbers and found that, while you could save a little money with this approach, it has its own problems, particularly if your credit is shaky. In that case, a lender might not be willing to approve a car loan without a down payment. Check with your lender and the car dealership to see what scenario works best for you.

Deal with life's curveballs

Sometimes you can't avoid the life changes that affect your vehicle needs. But if you understand how negative equity works and how to manage it, you will have the best chance of getting above water and right side up.