What is Negative Equity on a Car?

If your car’s current value is less than the amount you owe, you have negative equity. This is also known as being upside down on your auto loan. When the time comes to purchase a new car, having negative equity in your existing auto loan could make it challenging. Regardless of whether you want to trade in your vehicle or sell your vehicle to a private party, owing more on the car than it’s worth will make things more difficult.

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An automobile loses around 20% of its value in the first couple of years of ownership. This means that you may end up owing more money than your car is worth before you pay off your loan. For example, if you borrowed $30,000 from the bank and you still owe $15,000 on your car, but it’s only worth $10,000, you have a negative equity amount of $5,000.

Knowing the value of the car you own and how much negative equity you have can help you combat the negative effects it can have on your finances. Let’s explore more about negative equity on a car loan so you can avoid it when you apply for a new loan on your next automobile.

Does Your Car Have Negative Equity?

To find out whether your current car loan has negative equity, you can contact your lender to find out what your current loan balance is. Once you have that number, research the current value of the model you own. There are several websites you can use to learn the value of your vehicle, such as Kelley Blue Book. You’ll need to have some information about your car to get its estimated value, including:

The car’s mileageThe car’s year, make, and modelThe car’s condition

Answer the questions about your car on the valuation website, and when you know the car’s fair market value, you can determine the equity. You’ll simply subtract what you owe on your current vehicle from the amount it’s worth. So, if you still owe $20,000 on your vehicle, but its estimated value is only $18,000, you have a negative equity of $2,000.

These car valuation websites will probably provide you with the vehicle’s trade-in value and its value if you decide to sell it to a third party. Typically, you’ll get more selling to a third party, but they’re not likely to pay you more than the market value of the car.

How Does Negative Equity on a Car Loan Happen?

Even if you make all your monthly payments on time, you can still end up with negative equity on your current auto loan. This can happen for several reasons, such as:

You Made a Low Down Payment

Borrowing money to purchase a new vehicle often requires you to make a down payment. The amount you put down will affect your monthly payment amount as well as your interest rate and loan term. It will also affect the equity in your car loan. Making a higher down payment can help you avoid negative equity because it often leads to a lower payment and better loan terms.

If you made a low down payment on your previous loan, you may be at risk of having negative equity in your car loan. The reason for this is that you’ll likely have higher monthly payments and a higher interest rate.

You Put a Lot of Miles on Your Vehicle

The more miles a vehicle has, the less it’s worth. So if you put more miles than average on your vehicle, you may have more negative equity than you thought. For example, let’s say you drive a 2017 Chevrolet Equinox that’s in good condition with 70,000 miles on it. The vehicle trade-in value is going to be around $25,000, according to Kelley Blue Book.

However, if this same year, make, and model has 150,000 miles on it, that amount drops to $14,774. So if you still owe $20,000 on the car, in the first example, you’d have a positive equity amount. But if you have the higher mileage, you’re going to be upside down in your auto loan.

You Have Excess Wear and Tear on Your Vehicle

Your car’s wear and tear will affect whether you have positive equity or negative equity on your loan. The more damage a used car has, the less it’s worth to a potential buyer. If you want to avoid negative equity, take good care of your vehicle. This includes getting routine maintenance and keeping the car clean and free of body damage.

You Have a Bad Loan Term

If your original loan wasn’t ideal, you could end up with negative equity. Many car loans these days extend out for six, seven, or even eight years. When you have a longer loan term, you might pay less each month. Unfortunately, cars decrease in value every year. So the longer you’re paying off the loan amount, the more risk you have of being upside down when it comes to your car’s equity.

Problems With Negative Equity on a Car Loan

The way negative equity works can mean trouble if you want to trade or sell your car, but there are other problems you might face. When you owe more on a car than it’s worth, you may encounter these issues:

Your Car Will Be Hard to Trade In or Sell

Trade-ins aren’t going to garner as much money as selling your used car to a private party will. But no matter the condition, mileage, or other details that make your vehicle great, you will have a difficult time selling it if you have a larger loan than its value. If you need to sell your car quickly, you may have to pay the remainder of the loan out of your own pocket.

Your Next Auto Loan Will Be Expensive

If you need to take out a new auto loan for your next vehicle, it could be more expensive if you have negative equity in your current car loan. A dealer may offer to pay the lump sum on the remaining balance when you trade in your old car. This can help you obtain your next loan, but the dealer may end up charging you the full cost of that lump sum by wrapping it up into the cost of your next car loan.

Your Insurance Won’t Cover the Negative Equity

An insurance provider won’t cover any negative equity amount you owe. If your car is totaled, your loan provider will only pay enough money to cover its fair market value. If the loan amount has a remaining balance after the insurance claim pays out, the rest of the loan payoff amount will have to come from your own pocket.

Trading in a Car With Negative Equity

You can trade in a car with negative equity for a more expensive car, but it may not be the best option financially. This is because you will likely have more negative equity or continue the negative equity cycle in your new loan. New vehicles can be expensive, and if you’re already upside down with your loan payments, you may have to make larger payments or extend your loan term to ensure you can make your monthly payment.

Rolling Over a Negative Equity Into a New Car Loan

If you can’t wait to get a new loan because you need a new car now, these are some things you should know about rolling over negative equity into a new car loan:

Know What Your Car Is Worth

Before you make a move in the direction of getting a new loan, know what your car is worth. There’s a chance you may have enough cash to pay the difference between the loan balance and what the car is worth, so you can go from a negative equity loan to a positive equity loan. If the negative equity amount is minimal, you may be able to negotiate a private sale that works to your advantage.

In some cases, you can come out ahead when rolling over negative equity into your next loan. Buying a cheaper new car or a pre-owned model means your monthly payments will be lower. If you can get a better term and pay off the loan faster, you could end up with more equity in your new vehicle after making your final loan payment.

Shop Around for a New Car Loan

Shop around before you settle on a loan to ensure you get the best possible deal. A lender may offer to pay the negative equity for you, but be cautious of added fees or an increase in the price of the car.

Get Preapproved for an Auto Loan

A preapproval letter from a lending institution can give you leverage when negotiating a new car deal. It also lets you know how much you can afford to spend on a new vehicle so that you can avoid being upside down on your loan.

Understand Your New Loan

Make sure you read and understand the term of your new loan prior to signing the agreement. Ask if there’s a prepayment penalty or any other fees that may be associated with paying off the loan. You can also ask about late fees and penalties.

Tips to Fix Negative Equity in a Car Loan

If you have negative equity in your auto loan, here are some things you can do to fix it:

Make Extra Payments

Making extra payments on your current auto loan is one way to eliminate negative equity. Depending on how much negative equity you have, you could close the gap between what you owe and what your ride is worth by paying just a little more money each month or making an extra payment when you can.

Refinance Your Old Loan

It’s possible to refinance for a better loan if you want to keep your current car. You could end up with terms that improve your financial situation, helping you pay off what you owe sooner.

Use Other Resources

Other resources, such as borrowing money from a friend or relative, could help you pay the lender off early. If you know someone who could loan you the money you need, you’ll be able to pay the loan off. Once you own it outright, you can sell or trade in the car for something less expensive. This could give you extra money each month, which you can then use to pay back whoever helped you with the original loan.

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.