If you owe more on your car than it’s worth, you have an upside-down loan. This happens when your loan balance is higher than the car’s value, often due to steep depreciation, small down payments, or long loan terms.
It’s a common problem, but not permanent. By paying down the loan faster, refinancing, or selling, you can close the gap and get out of negative equity.
What Does It Mean to Be Upside-Down on a Car Loan?
An upside-down, or negative equity, car loan happens when you owe more than your car is worth. If you sold it today, the sale wouldn’t cover your remaining loan balance.
This often happens because new cars lose value quickly—sometimes up to 20% the moment they leave the lot and around 30% in the first year. Small down payments, long loan terms, rolling over debt from a previous car, or paying high interest due to bad credit can all make the gap bigger. Rising car prices and ultra-long loans, like 84-month terms, have made this more common.
How to Tell If You’re Upside-Down on Your Car Loan
Check your most recent statement or contact your lender to find your current loan balance. Then, get your car’s market value from tools like Kelley Blue Book or the National Automobile Dealers Association. Factors like age, mileage, condition, and demand will affect the number.
If your balance is higher than your car’s value, you’re upside-down. This is common in the early years of a loan, but knowing your position helps you decide the best way to reduce or eliminate negative equity.
Why an Upside-Down Car Loan Can Cost You More
If your car is totaled or stolen, your insurance will only pay its market value—not what you still owe. That means you could be left owing the lender hundreds or even thousands of dollars.
Negative equity can also make trading in your car harder. Dealers may roll the unpaid balance into your next loan, which increases your monthly payment and can leave you even deeper in debt. Beyond the financial hit, it can create ongoing stress and limit your options. The good news: there are practical ways to turn it around.
5 Ways to Get Out of an Upside-Down Car Loan
There’s no single best fix for negative equity—it depends on your budget, loan terms, and how long you plan to keep the car. Here are five strategies that can help.
1. Keep Paying the Loan
If you can afford the payments and plan to keep the car, continue paying until the loan balance drops below the car’s value. This builds equity over time, though it may take years.
2. Refinance the Loan
If your credit has improved, refinancing to a lower interest rate can save money and help you pay down the principal faster. Avoid stretching the term too long, or you may stay upside-down longer.
See also: Best Auto Refinance Companies of 2025
3. Sell the Car and Pay Off the Loan
Selling your car might be an effective solution to counter the negative equity. A private sale often brings more than a trade-in. If the sale price doesn’t cover the balance, pay the difference with savings or a small personal loan.
4. Consider Voluntary Repossession or Bankruptcy
In severe situations where the loan has become completely unmanageable, you might contemplate voluntary surrender or bankruptcy. However, both these options will drastically impact your credit scores and should only be considered as last-resort measures.
5. Use Gap Insurance
While it won’t reduce what you owe, gap insurance covers the difference between your loan balance and your car’s value if the car is totaled—protecting you from even bigger losses.
How to Prevent Upside-Down Car Loans in the Future
Avoiding negative equity starts before you sign the loan agreement. These strategies can help you stay ahead.
Make a Larger Down Payment
A bigger down payment reduces the amount you borrow and gives you a head start on building equity. It also cushions you against early depreciation.
Choose a Short Loan Term
Shorter terms mean higher monthly payments, but you’ll pay off the loan faster and lower the risk of owing more than the car is worth.
Make Extra Payments
Even small additional payments toward the principal can speed up your payoff and help you maintain positive equity.
Consider Buying Used
Used cars have already gone through the steepest depreciation, making it easier to keep the loan balance below the car’s value.
Pick an Affordable Loan Agreement
Choose a car and loan that fit comfortably within your budget. Expensive vehicles with long terms can quickly lead to negative equity.
Monitor Your Car’s Value
Check your car’s market value regularly with trusted sources like Kelley Blue Book or the National Automobile Dealers Association.
Maintain Your Car Well
Regular maintenance and care help preserve your car’s value, making it less likely you’ll owe more than it’s worth.
Final Thoughts
An upside-down loan doesn’t have to lock you in place. The right plan—whether it’s paying extra, refinancing, or choosing a smarter loan upfront—can put you back in control.
If you’re already dealing with negative equity, act sooner rather than later. Small steps now can prevent bigger financial problems down the road and keep you in a stronger position for your next car purchase.
Frequently Asked Questions
Does an upside-down car loan impact my credit score?
Being upside-down on a car loan doesn’t directly hurt your credit score. However, if it causes financial strain that leads to missed or late payments, your credit score can drop. Consistently making payments on time is the best way to protect your credit.
What happens if I total my car while having an upside-down car loan?
If your car is totaled, your insurance company will usually pay its current market value. If that amount is less than your loan balance, you’ll need to cover the difference unless you have gap insurance to make up the shortfall.
What are the implications of an upside-down car loan if I want to lease my next car?
Rolling negative equity from a car loan into a lease is possible with some lenders, but it increases your lease payments. It can also put you at risk of starting the lease already upside-down.
Can I transfer my upside-down car loan to someone else?
In most cases, car loans are not transferable unless the lender approves it and the new borrower qualifies. Even then, lenders typically require the full loan balance to be paid off first, so this option is rare for those with negative equity.
Is it better to trade in or sell a car with negative equity?
Selling privately often brings a higher price than trading in, which can help reduce the gap between your car’s value and your loan balance. Trading in is faster and more convenient but usually results in getting less for the car.
