As car prices and interest rates climb, a growing share of Americans owe more on their car than it’s actually worth — a situation referred to as an “upside-down” or “underwater” car loan.
In the final quarter of 2025, roughly 30% of trade-ins came with negative equity, according to car shopping site Edmunds. The average amount owed hit an all-time high of $7,214.
Having a trade-in with negative equity means you’ll have to pay your balance out of pocket or roll it into a new loan. Not only will you start out underwater on day one, but you’ll face higher payments and more interest over time.
“The biggest risk is you never get out of it, and it just keeps [compounding],” said Jessica Caldwell, director of insight at Edmunds. “You could be buying a $30,000 vehicle, but because you’re rolling over debt from your previous loan, you’re now paying $37,000.”
Some buyers keep repeating the process, Caldwell told CNBC Select. “Then, one day, you find yourself paying $50,000 for a Toyota Camry.”
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What is an upside-down car loan?
Unlike homes, cars don’t generally gain value as they get older. A new car loses up to 20% of its value in just its first year, “especially luxury vehicles, electric vehicles or anything with more technology, features and creature comforts,” Caldwell said.
Your loan is considered upside down when you owe more on your vehicle than its current market value. It’s most common early on, when the car is losing value faster and your payments are going mainly toward interest, not principal.
Having sizable negative equity makes it harder to get approved for another loan: If you owe $20,000 on a car worth $14,000 and trade it in for one that costs $10,000, the dealer would have to roll over the $6,000 balance. That means lending you $16,000 for an asset worth $10,000.
According to a 2024 report from the Consumer Financial Protection Bureau, consumers who rolled over negative equity into new financing were 1.5 times as likely to have their car repossessed within two years.
“Negative equity is risky for banks,” Caldwell said. “You can’t simply trade in your vehicle for something cheap, as many people suggest, because banks won’t approve those loans.”
Trade-ins are usually only approved if the old balance is low enough that the new loan still looks justifiable.
Why an upside-down car loan is risky
Negative equity is primarily an issue if you’re trying to sell or trade in your car. But it can also be a problem if the vehicle is totaled or stolen — your insurance company will typically reimburse you only for its depreciated value, not the cost to replace it.
That’s why drivers who finance their vehicle are usually required to carry gap insurance, which can cover the difference. (Even if the car is gone, you still need to make payments.)
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According to the Edmunds report, the average monthly car payment for buyers who rolled negative equity into a new auto loan reached a record $916, compared to an overall average of about $806.
“That’s a fairly significant amount of someone’s budget allocated just to transportation,” Caldwell said. “And that doesn’t include gas or insurance, which can be quite expensive as well.”
How to find out if you have an upside-down car loan
Here’s how to check if you have negative equity in your vehicle.
1. Estimate your car’s current market value
You can get a real-time estimate of your car’s worth by using an online appraisal tool from sites like Kelley Blue Book, Edmunds, Carfax or Carvana. For a more specific figure, make sure you have your mileage and Vehicle Identification Number (VIN), located on the driver’s side of the dashboard.
2. Review your loan payoff amount
Log in to your account or reach out to your lender for your loan payoff amount, which reflects the total balance you owe when your term is scheduled to end. It will include any remaining principal, plus accrued interest since your latest payment and any applicable fees.
3. Compare the two figures
To find how much equity you have in your vehicle, subtract the loan payoff amount from the current market value. If the number is negative, you’re upside down.For example, if your car is worth $10,000 but your loan payoff amount is $18,000, you have an upside-down loan with $8,000 in negative equity.
The value of your car can change dramatically, so review your standing every few months. That’s especially important if you’re thinking about selling or trading in or are concerned about insurance coverage.
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How to get out of an upside-down car loan
There isn’t a quick fix if you’re already underwater, according to Caldwell, but there are strategies that can help minimize the impact.
Hold onto your car. “The average age of a trade-in vehicle for people with negative equity was 3.5 years,” Caldwell said. “Could you keep a vehicle longer than that? Yes, absolutely, especially with the quality of vehicles today. There’s no reason to trade in a vehicle after three-and-a-half years.”
Your car will always lose value, but the rate of depreciation will eventually slow, according to the credit bureau Experian, especially after about five years.
Make extra payments. Whether you make one lump sum payment or increase how much you send each month, anything you can do to lower your loan balance will help. Just make sure the additional funds go to your principal, and not the interest.
Refinance your car loan. If your credit score or income has improved since you took out your loan, refinancing could get you a lower interest rate or a shorter repayment term. Capital One Auto Finance lets borrowers prequalify online without a hard credit check and approval decisions can be made in under 24 hours.
Sell the car. Selling your car won’t make your loan balance disappear, but you can use the money to pay it off. Selling cars privately usually garners more money than a trade-in. Contact your lender to see how much you need to pay to fully satisfy your loan, then look up your car’s value on Kelley Blue Book or Edmunds.
Did you know?
According to Edmunds, the spike in negative equity is concentrated among borrowers with higher-dollar debt: More than a quarter (27%) of underwater trade-ins carried balances of $10,000 or more. Of those, a record 9.2% owed more than $15,000.
How to avoid an upside-down car loan
Carrying negative equity can make it harder to trade in or sell your vehicle and, if it’s stolen or totaled, cost you thousands. Here’s how to steer clear of the problem when you’re shopping for a car.
Don’t roll over negative equity. Adding your existing loan to new financing puts you underwater on day one. Pay off your old balance before financing another car.
Make a larger down payment. With a smaller loan, “the risk is somewhat mitigated,” Caldwell said. A 20% down payment can offset the immediate depreciation that occurs in that first year.
Select a shorter loan term. It might stretch your budget, but a 36 to 48-month term will mean a larger monthly payment, which will speed up how fast you pay off the principal.
Buy a used car. Buying a car that’s at least a few years old lets someone else absorb that early depreciation. However, Caldwell cautions, a loan for a used car usually comes with a higher interest rate, “so, look at the all-in cost.”
Pay up front. Dealerships often try to roll taxes, registration fees, extended warranties and other costs into your loan, all of which will cost you more in the long run. Pay for as much as you can upfront.
Research the car’s resale value. All cars depreciate as they get older, but some brands, like Toyotas and Hondas, are known for retaining value longer.
FAQs
What is an upside-down car loan?
An upside-down (or underwater) car loan is one in which the total balance due exceeds the vehicle’s current market value.
How can I avoid being upside-down?
There’s no foolproof way to avoid negative equity, but a larger down payment (at least 20%) will lower your loan amount and make it less likely you’ll end up underwater, as can a shorter loan term (48 months or less). Steer clear of long loan terms (72-84 months) or rolling taxes and fees into your loan.
Can I get gap Insurance if I’m already upside-down?
Most providers require borrowers to obtain gap insurance within 30 days of initial financing. If the vehicle is stolen or totaled, the policy will pay the difference between its market value and what your insurance company is willing to reimburse you.
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