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Debt and credit

Negative equity

Owing more on a loan than the thing it paid for is worth, most often a car loan balance that's higher than the car's value.

What It Means

Negative equityHome equityThe part of your home you own outright: its current value minus everything you still owe on loans secured by it. See more means you owe more on a loan than the thing it paid for would sell for. It's most often said of cars, where people also call it being "upside down," and the CFPB notes that longer car loansCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more make it more likely. A home worth less than its mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more is in the same position. This shortfall matters when you sell, trade in, or lose the car, because the loan still has to be paid.

Try It: See What Rolling Over Negative Equity Costs

Slide the trade-in value. The other figures are examples; use your own payoff amount and offer.

Negative equity$4,000
New loan if it's rolled in$36,000
Extra each month from the rollover$79.20

Rolled in, the old car's shortfall costs $4,752 over the new loan.

How People Say It

  • "I'm upside down on my car."
  • "The dealer said they'd just roll it into the new loan."
  • "We owe more on the car than it's worth."

The Breakdown

Worked example. You still owe $18,000 on your car and the dealer offers $14,000 for it, so you have $4,000 of negative equity. Your next car costs $32,000, financed at an example 7% for 60 months:

Without the old balanceWith $4,000 rolled in
Amount financed$32,000$36,000
Monthly payment$633.64$712.84
Paid over 60 months$38,018.30$42,770.59

What the result means. Rolling the $4,000 into the new loan adds $79.20 a month and $4,752 over the term, so you pay interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more on money that bought a car you no longer own. The new loan also starts out underwater, since you owe $36,000 on a $32,000 car the day you drive away, and the next trade-in can repeat the cycle.

Ways to shrink it. Keep the car longer and keep paying, since each payment lowers the balance. Pay the difference in cash at trade-in if you can. On the next car, a larger down paymentDown paymentThe share of a home's price you pay upfront in cash when you buy it; the mortgage covers the rest. See more and a shorter term keep the balance closer to the car's value.

Good to Know

The FTC and the CFPB both warn that a dealer may offer to roll negative equity into the new loan, and that doing so makes the new loan more expensive. Ask to see the old payoff, the trade-in value and the new amount financed as separate lines on the contract. If the car is totaled or stolen while you're upside down, the insurance payout may not cover what you owe. GAP insurance covers that difference; the CFPB says it's optional, that your own auto insurer may offer it, and that prices vary, so shop around.

FAQ

What does it mean to be upside down on a car loan?

You owe more on the loan than the car is worth. If you sold or traded it in, the money you got wouldn't pay off the loan, and you'd have to cover the rest.

Can I trade in a car with negative equity?

Yes, but the shortfall doesn't disappear. The FTC and the CFPB say a dealer may roll it into the new loan, which raises what you borrow and what the new loan costs overall.

Does GAP insurance cover negative equity?

It covers the difference between your loan balance and what your auto insurer pays if the car is totaled or stolen. The CFPB notes it's optional and that your own insurance company may offer it, so compare prices.

Do It in Buhata

Vault, Countdown

With Plus, keep the car loan papers and the car's current value in Vault, and add the loan's payoff date to Countdown.

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Related Terms and Categories

  • Car loan

    An installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral.

  • Loan term

    How long you have to repay a loan, usually stated in months for a car loan and in years for a mortgage.

  • Home equity

    The part of your home you own outright: its current value minus everything you still owe on loans secured by it.

  • Down payment

    The share of a home's price you pay upfront in cash when you buy it; the mortgage covers the rest.

  • Amortization

    Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.

  • Refinancing

    Replacing a loan you already have with a new one, usually to get a lower rate, a different term or a different payment.

Debt and credit

Sources

Federal Trade Commission, "Auto Trade-Ins and Negative Equity: When You Owe More than Your Car is Worth"; Consumer Financial Protection Bureau, "Should I trade in my car if it's not paid off?"; CFPB, "What is Guaranteed Asset Protection (GAP) insurance?"; CFPB, "Auto loans key terms"; CFPB, "Negative Equity in Auto Lending" (June 2024)

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