You're not alone if your car loan balance is more than your vehicle's actual worth. This upside-down situation, called a negative equity auto loan, can leave you unsure about your next move. Knowing what negative equity is, why it happens, and what you can do about it puts you back in charge when planning your car-buying future.
Understanding Negative Equity in Cars
Negative equity is when you owe your lender more than what your car would be worth if it were sold today. Recent statistics reveal that 39% of people with car loans face negative equity as of the fourth quarter of 2024, up from 31% just one quarter earlier.
Cars drop in value faster than your loan balance shrinks. New cars typically lose over 10% of their value the minute you drive off the lot, and they lose 20% or more within the first year. Fast forward five years, and the vehicle is worth roughly 40% of what you paid, with some models depreciating by up to 60%. Your monthly payments mostly go toward interest early on rather than the principal amount you borrowed.
Electric vehicle (EV) owners are affected the most. Around 54% of EV owners owe more than their cars are worth, up from 46% just months ago, with the typical EV owner underwater by about $2,345. EVs typically depreciate 35%-40% in the first year and sink to 45%-50% of their original price after five years. Long loan terms of 84 months carry a median negative equity of $8,485, while shorter 36-month loans show positive equity of around $7,783.
Approximately 60% of drivers think their trade-ins are worth far more than dealers will actually pay, and 17% overestimate that figure by $5,000 or more. If you're thinking about trading in while still owing money, knowing the facts is crucial.
How Negative Equity Affects You
Negative equity impacts you the most when you want out of your current car loan. You'll need to pay the difference between your loan balance and the car's value, either with cash or by rolling the shortfall into a new loan. Nearly one in four new-car trade-ins were underwater in the second quarter of 2025. Buyers who rolled this debt forward averaged an extra $159 in monthly payments and borrowed $12,388 more than the average car buyer.
Underwater buyers finance larger amounts than typical buyers, which can push your monthly payments to $915 compared to the average $756. This creates a cycle where your new car starts underwater, too, limiting which vehicles you can buy due to loan-to-value caps. Late car loan payments now exceed prepandemic levels.
GAP insurance is important when you're underwater on your loan. If your car is totaled or stolen, regular insurance only pays market value, leaving you responsible for the rest of your loan. Typical dealer GAP coverage ($400-$700 or more) is usually rolled into financing, though some credit unions offer it for a flat fee of around $499. While owing more than your car's worth won't directly affect your credit score, it affects how lenders view you when applying for future loans. They might see you as a higher risk, potentially influencing interest rates and approval odds.
What To Do When Faced With Negative Equity
The simplest way to escape negative equity is to keep up with payments until you reach positive equity, and pay extra whenever you can. Consider selling your car privately, which can often net a higher price than a dealer trade-in. However, be aware of hidden costs such as listing fees, detailing expenses, and fixing minor issues that buyers spot during test drives.
Trade-ins bring perks that private sales don't, and the process wraps up in one appointment instead of weeks dealing with private customers. Many states offer tax advantages for trade-ins, including reducing the taxable amount on your new purchase. Plus, dealerships follow strict regulations, giving you safer transactions with proper paperwork.
Refinancing might help if your credit has improved since your original loan. Start by checking your credit score, shop with different lenders for better rates, gather your paperwork, and submit applications. You may find leasing works better for you, or you may choose to wait for manufacturer rebates that could offset some negative equity. Always look beyond the monthly payment to your total financing costs.
Negative Equity FAQ
You may be panicking, thinking negative equity spells financial disaster, but this isn't necessarily true. If your loan payments outpace your car's depreciation rate, you'll eventually find yourself back above water. The timeline varies widely based on your loan terms and how quickly your specific vehicle loses value. Making extra payments can work wonders for speeding up equity recovery. Try biweekly payments to save on interest costs and add an extra payment to your yearly total.
Today's negative equity crisis stems largely from drivers who bought during the 2021-2022 inventory shortage. Many paid full sticker price or higher for vehicles that later dropped in value faster than expected.
To avoid negative equity, put down at least 20% to guard against initial depreciation. Pick the shortest loan term you can afford, and pay taxes and fees upfront rather than financing them. Choose cars known for holding their value, and consider slightly used cars that have already taken the steepest depreciation hit.
Success hinges on honestly assessing where you stand, exploring all your alternatives, and making choices that fit your specific money situation and transportation needs. Talk with our team at Huffines Chrysler Jeep Dodge Ram (CJDR), who deal with these situations daily — we've seen it all and can help map your best path forward.
Expert Guidance for Your Automotive Financial Decisions
If you're ready to tackle your negative equity, stop by our Huffines CDJR Plano dealership, where our finance team can evaluate your numbers, talk through your options, and find solutions that won't break your budget. Our team knows the Plano market inside and out and can give you straight answers. We're here to help you problem-solve so you can drive away confident about your car-buying decisions.
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