What to Do If You Have Negative Equity on Car

Having negative equity on a car, also known as being “upside down” or “underwater,” means the outstanding balance on your auto loan is greater than the vehicle’s current market value. This often occurs because cars depreciate rapidly, sometimes losing 20% of their value in the first year. Long loan terms and low or no down payments also contribute, as the loan balance decreases slower than the car’s value. While common, there are steps to manage and resolve negative equity.

Determining Your Negative Equity

Understanding your negative equity is the first step toward addressing it. This calculation requires two pieces of information: your outstanding loan balance and the vehicle’s current market value.

To obtain your precise loan payoff amount, contact your lender directly. This can be done by checking your online account, calling customer service, or reviewing your monthly statement. Request the full payoff amount, as this includes any accrued interest and may differ from the principal balance shown on a regular statement.

Next, research your car’s current market value using reputable valuation resources such as Kelley Blue Book, Edmunds, or NADAguides. When using these tools, accurately input your vehicle’s specific details, including its make, model, year, trim, mileage, and overall condition, to ensure the most realistic estimate. These platforms typically provide both trade-in and private sale values. Once you have both figures, calculate your negative equity by subtracting the vehicle’s current market value from your loan payoff amount. For instance, if you owe $20,000 and your car is worth $15,000, your negative equity is $5,000.

Strategies for Reducing Negative Equity

Once you determine your negative equity, several proactive strategies can help reduce it while you retain possession of your vehicle. These methods focus on increasing your equity faster than the vehicle depreciates.

Making extra payments directly to your loan’s principal balance can accelerate equity growth. Even small, consistent additional payments reduce the interest accrued over the loan term, allowing more of your payment to go toward the principal. Consider allocating unexpected funds, such as tax refunds or bonuses, or re-evaluating your monthly budget to find extra money for your car loan.

Refinancing your car loan is a viable strategy, especially if interest rates have dropped or your credit score has improved since you initially financed the vehicle. A lower interest rate means less of your monthly payment goes to interest, allowing more to reduce the principal balance. While refinancing can help pay down principal faster, it may not be an option if your negative equity is substantial, as lenders are cautious about refinancing loans with a high loan-to-value (LTV) ratio.

Reducing other monthly expenses, such as car insurance costs, can indirectly free up funds to apply towards your car loan. By shopping around for new insurance quotes, increasing your deductible if feasible, or bundling policies, you may be able to lower your premium. The savings from these adjustments can then be consistently directed as extra payments to your car loan principal.

Understanding depreciation and allowing time to pass can also help. While vehicles depreciate quickly in their early years, the rate of depreciation slows over time. As you continue to make regular payments, your loan balance decreases, eventually allowing the loan balance to catch up with and surpass the vehicle’s value. This “wait it out” approach is most effective when combined with other strategies to accelerate equity growth.

Options When Selling or Trading Your Car

When disposing of your vehicle with negative equity, specific considerations arise for selling or trading it. Each option has distinct financial implications.

Selling the car privately often yields a higher price than a dealership trade-in, which can help minimize the negative equity you need to cover. You will need to pay the difference between the selling price and your outstanding loan payoff amount directly to your lender at the time of sale. This payment is necessary to release the lien on the vehicle and transfer the title to the new owner.

Trading in your car at a dealership simplifies the transaction, as the dealer handles the payoff of your existing loan. However, dealerships commonly address negative equity by “rolling over” the outstanding balance into your new car loan. This practice increases the principal amount of your new loan, potentially placing you in a negative equity position on the new vehicle from the outset and increasing the total interest paid over time. Avoid rolling over negative equity unless absolutely necessary, and if pursued, ensure you fully understand how it impacts your new loan’s total cost and terms.

Voluntary repossession, where you return the vehicle to your lender, is a last resort for extreme financial hardship. It has severe negative consequences. Your credit score will be significantly impacted, and the repossession can remain on your credit report for up to seven years. You remain responsible for any “deficiency balance,” the difference between what you owe and what the lender sells the car for, plus any associated fees. Lenders can pursue legal action to collect this remaining balance.