What Is Negative Equity on a Car Loan (and How to Get Out of It)

You’re looking at a newer vehicle, only to learn that your current car is worth less than what’s owed on the loan. What is negative equity? It occurs when the loan balance is higher than the vehicle’s market value. Also known as being upside down or underwater, this situation happens countless times every day to unsuspecting car owners. 

According to Edmunds, almost 30% of trade-ins at the end of 2025 involved negative equity. We’ll explain why negative equity happens and how to tell if you’re at risk. You’ll also learn what to do if you’re facing this situation and still want to trade in or sell the vehicle. 

What Does It Mean to Be Upside Down on a Car Loan?

At its simplest, equity is the difference between what you owe on the car and what it's worth. If that value is higher than the loan payoff amount, you’re left with positive equity. If the situation is reversed (the value is less than the loan balance), you’re upside down on the loan. 

For example, a loan payoff of $24,000 combined with a car’s market value of $19,000 leaves a shortfall or negative equity of $5,000. In 2025, the average negative equity climbed to over $7,200, a record high. While being underwater isn’t ideal, it doesn’t affect day-to-day ownership. This situation only matters if you’re trying to sell or trade in the vehicle. Negative equity may also come into play if the vehicle is totaled after an accident. 

How to Calculate Your Car’s Equity

Let’s get into the specifics of calculating your car’s equity. You only need two numbers: the loan payoff amount and the vehicle’s current market value. Here’s how the formula works:

Loan Payoff Amount − Vehicle Market Value = Equity Position

Step 1: Get Your Exact Loan Payoff Amount

The balance shown on your most recent loan statement may differ from the amount required to pay off your loan. Interest accrues daily, so you’ll need to request a payoff quote, which is usually available through an online account portal or by contacting the lender’s customer service department. 

Step 2: Find Your Car's Real Market Value

Next, you’ll need to determine the car’s current value. You may encounter different resources that cite trade-in, private-sale, and retail values. Keep in mind these numbers represent different selling situations, with pricing that can fluctuate by thousands of dollars. The best resource is a VIN-based tool like GoodCar's Residual Value calculator that can provide a more realistic estimate before you calculate the car’s equity position. 

Step 3: Subtract to Find Your Equity Position

With both numbers in hand, subtract the car’s market value from the loan payoff amount. Here are two scenarios:

How Common Is Negative Equity in 2026?

As Edmunds reported, almost 3 in 10 trade-ins involved negative equity in the last quarter of 2025. To make matters worse, 27% of these transactions showed negative equity balances exceeding $10,000. Some of this has to do with longer-term loans that can stretch to 84 months, the result of buyers seeking more manageable monthly payments.

What Causes Negative Equity on a Car Loan

Several factors can lead to a negative equity car loan. They may occur individually or in combination. 

A Small or No Down Payment

A car loan with no or little down payment can help preserve cash, but it means you're financing 100% of the vehicle. That means things like taxes, registration fees, optional products, and dealer add-ons get rolled into the loan. These costs translate into a loan balance beyond the price of the car from day one. Add in the fact that most depreciation occurs during the first years of ownership, and it’s easy to see how negative equity can start. A 10%–20% down payment can help offset early depreciation and put you on a faster path toward positive equity.

A Long Loan Term (72–84 Months)

Longer-term loans make monthly payments more affordable and help offset higher purchase prices and increased loan costs. During the early years of most auto loans, a larger portion of the monthly payment goes toward interest rather than principal. However, normal depreciation continues. 

So, it can take several years for the car’s value to exceed the loan balance. Longer loan terms multiply this effect. Notably, Experian reports that over 35% of new vehicle loans had terms of 72 months or more in the first quarter of 2026.

Fast Depreciation

The typical new car depreciates by almost 41% over five years, according to iSeeCars, but that’s just an average. Some vehicles, such as electric vehicles and luxury sedans, are notorious for even worse depreciation. Plunging valuations accelerate the risk of negative equity, especially with little or no down payment. Before buying any vehicle, even a used one, check out the car’s depreciation history (or estimate) by using a VIN-based market value tool. 

Rolling Over Negative Equity From a Previous Loan

More and more car owners are trading in vehicles with negative equity. Rolling over $3,000 of negative equity turns a $25,000 loan into a $28,000 one. As a result, you’re also paying interest on the larger amount, which further delays the start of positive equity. Compounding the problem are those who repeat the cycle every few years, which only increases the financial risk. 

What Happens When You Trade In a Car With Negative Equity?

The gap between the payoff amount and a vehicle’s market value doesn’t disappear when you trade in a car. This shortfall can be covered in two ways: pay the difference out of pocket or roll it into the loan on the new vehicle. Yet there are significant considerations with that second option: a larger loan balance, higher monthly payments, and more interest paid.

There are real-world consequences with this approach. A report from Edmunds says that the average monthly payment for a buyer who rolled in negative equity into a new loan is $915, compared to $756 for all financed new-vehicle purchases. Keep in mind that lenders monitor loan-to-value ratios and buyers’ financial background. Financing may not be approved if negative equity is too high or the borrower has poor credit. 

Your Options If You're Upside Down on a Car Loan

Negative equity can be an unpleasant fact of life in today’s car market. Here are some different options for dealing with the situation, listed from least to most expensive (over time). 

Keep the Car and Keep Paying

In many cases, keeping your current car is the least expensive way to eliminate negative equity. As payments continue, the loan balance decreases. After the first few years, your car's depreciation typically slows, helping reduce the gap between what you owe and what it's worth. This approach is best if the car is reliable and monthly payment is affordable.

Make Extra Principal Payments

Adding extra to each monthly loan payment can steadily reduce the negative equity. Here’s what an additional $100 per month can do:

*Example assumes a $30,000 remaining loan balance, 8% APR, 60 months remaining, and the borrower continues making the required monthly payment while adding an extra $100 per month toward principal.

Pay the Gap in Cash at Trade-In

If you’ve decided to replace the vehicle and have the funds available, pay the negative equity out of pocket. This way, you won’t pay unnecessary interest, and the loan will be based solely on the new car’s valuation. It’s a chance at a fresh financial start.

Refinance the Current Loan

Refinancing the existing car loan is another strategy that might lead to a lower interest rate, a lower monthly payment, or other improvements in terms. You may be able to build equity more quickly or use any savings to pay off the loan sooner (see the extra payment example above). Not all loans with negative equity will qualify for refinancing (credit ratings matter, too), but it may be an option worth pursuing. 

Roll It Into a New Loan (Know the Trade-Off)

Sometimes, replacing a vehicle can't wait. An unreliable car, a growing family, or a longer commute may create an inescapable urgency. Before signing any paperwork, have a full understanding of what rolling negative equity into a new car loan means. In addition to a larger loan balance, higher payments, and more interest, you’re likely creating another negative equity situation with the new vehicle. Using GoodCar's Car Loan Calculator can help you see exactly how the rollover amount affects your monthly payment and total borrowing costs.

Another Option: Sell Privately Instead of Trading In

Squeezing every dollar out of a car is essential for reducing any negative equity. One way to do this is by selling the vehicle yourself. A private sale usually commands a higher price than a dealer’s trade-in offer. However, you’re still responsible for paying off the loan and must do so before transferring the title to a buyer. There are extra steps with a do-it-yourself approach, including reassuring shoppers that the car has been well-maintained and has a clean history. A GoodCar Vehicle History Report can help build buyer confidence. 

Does Negative Equity Hurt Your Credit Score?

Having negative equity on a car doesn’t affect your credit score by itself. Credit bureaus only track car loan balances and the related payment history. However, negative equity can make it harder to qualify for a new auto loan. In addition, a larger loan balance may result in a higher monthly payment, increasing the risk of late payments or default. 

How to Avoid Negative Equity on Your Next Car

You can't eliminate the risk entirely, but these steps can help reduce your chances of ending up upside down on a loan:

• Put at least 10% to 20% down when buying a vehicle.
• Choose a loan term of 60 months or less whenever possible.
• Research depreciation before buying to avoid vehicles that lose value quickly.
• Don't roll negative equity into your next loan unless it's necessary.
• Know your vehicle's market value before negotiating a purchase or trade-in.
• Consider selling the car privately instead of trading it in.

Frequently Asked Questions

How do I know if I'm upside down on my car loan?

While a dealer might advise you about your car’s equity situation, you can find the details on your own. Compare the vehicle’s current market value with the loan’s exact payoff amount. If the payoff exceeds the valuation, you’re upside down. 

What is a normal amount of negative equity?

Each car and associated loan is unique, but the average underwater car had negative equity totaling $7,214, according to Edmunds research. At the same time, over 25% of these vehicles had negative equity that exceeded $10,000. 

Can I trade in a negative equity car?

Yes, in many cases. Trading a vehicle with negative equity is commonplace in today’s market; dealers are well-versed in these situations. However, lenders have the ultimate say in approving loans with rolled-over negative equity. 

Should I pay off negative equity before buying a new car?

Yes. Most dealerships handle trade-ins with negative equity every day, though you'll still be responsible for the shortfall by paying it upfront or financing it as part of your next loan. .

Does GAP insurance help with negative equity?

Not during a normal sale or trade-in. GAP insurance only applies if your vehicle is declared a total loss after an accident or is stolen. It covers the difference between your insurance payout and the remaining loan balance in those situations. However, GAP insurance doesn't pay off negative equity when you voluntarily sell or trade in your vehicle.

How long does it take to no longer be upside down?

For many borrowers, it takes one to three years to reach positive equity. However, the timeline depends on factors such as your down payment, loan term, interest rate, and how quickly your vehicle depreciates. Rather than waiting until you're ready to trade in, check your equity position every few months so you can track your progress and make informed decisions.