How to Calculate Negative Equity on a Car
Gain clarity on your car's financial position. Our guide shows you how to accurately determine if you have more debt than your vehicle's current value.
When the amount owed on a car loan exceeds the vehicle’s current market value, it results in a financial situation known as negative equity, often referred to as being “upside down” on the loan. This circumstance is relevant for car owners because it impacts decisions such as selling, trading in, or even insuring the vehicle.
Defining Negative Equity
Negative equity occurs when the outstanding balance of your car loan is greater than the car’s actual market value. The two primary components in determining negative equity are the remaining loan balance and the car’s current worth.
Several factors can contribute to a car having negative equity. Rapid depreciation, where a vehicle loses a significant portion of its value quickly, is a common cause, especially for new cars which can lose over 20% of their value within the first year. Additionally, making a low down payment or opting for an extended loan term can increase the likelihood of negative equity, as the loan balance may decrease slower than the car’s market value.
Key Information for Calculation
To accurately calculate negative equity, you need two specific pieces of financial information. The first is your current loan payoff balance, which is the total amount required to fully satisfy your loan today. This figure includes the remaining principal, accrued interest, and potential fees, and it differs from the principal balance on a regular statement. You can obtain this balance by directly contacting your lender, checking your online loan portal, or reviewing your latest loan statement. Many lenders offer a “10-day payoff” quote.
The second is the current market value of your car, which reflects what the vehicle is worth if sold or traded. This value is influenced by factors such as the car’s make, model, year, trim, mileage, condition, and added features.
Reliable online valuation tools, such as Kelley Blue Book (KBB) or Edmunds, can help you determine your car’s market value. When using these tools, input specific details about your vehicle, such as its VIN, mileage, and condition. These platforms provide an estimated value based on recent sales data and market trends.
Calculating Your Negative Equity
Once you have your current loan payoff balance and your car’s current market value, the calculation for negative equity is straightforward. The formula involves subtracting the car’s market value from the outstanding loan payoff balance.
The formula is: Current Loan Payoff Balance – Current Market Value of Car = Negative Equity (or Positive Equity). If the result of this calculation is a positive number, it indicates that you have negative equity; you owe more on the car than it is currently worth. Conversely, if the result is zero or a negative number, it means you have positive equity, where the car’s value is equal to or greater than the amount you still owe.
For example, if your loan payoff balance is $18,000 and your car’s market value is $15,000, your negative equity would be $3,000 ($18,000 – $15,000 = $3,000). In another scenario, if you owe $10,000 and your car is valued at $12,000, you would have $2,000 in positive equity ($10,000 – $12,000 = -$2,000, indicating positive equity).