Upside down on a car loan
You are upside down on a car loan when you owe more on it than the car is worth. People also call it negative equity. It is common, and while you keep the car and keep paying, it may never cause you a problem. It bites when you need to get out of the car.
If the car is totaled or stolen, insurance pays what the car is worth, not what you owe. You still owe the rest. If you need to sell it or trade it in, you have to cover the difference in cash, or carry it into your next loan.
How it happens
- A small down payment. Tax, fees and any extras go into the loan, but they add nothing to what the car is worth. With little or nothing down, you can owe more than the car is worth the day you drive it home.
- A long loan. Early payments carry the most interest, so the balance falls slowly at first.
- A car that loses value fast. Cars lose value fastest in their first few years, and some models drop faster than others.
- An old loan rolled into the new one. If you still owe more than your trade in is worth, the difference gets added to the new loan.
Worked example
How long you stay upside down
- Out the door price, tax and fees included
- $26,000
- Down payment
- $1,000
- Amount borrowed
- $25,000
- APR and term, for example
- 9% for 72 months
- Monthly payment
- $450.64
Swipe the table sideways to see every column.
| Car worth | You owe | Where you stand | |
|---|---|---|---|
| After 1 year | $20,000 | $21,708.75 | Upside down by $1,708.75 |
| After 2 years | $17,000 | $18,108.77 | Upside down by $1,108.77 |
| After 3 years | $14,500 | $14,171.08 | Ahead by $328.92 |
Three years in, you have made 36 payments and only just come out ahead. If the car had been totaled after the first year, insurance would pay what it was worth, less your deductible. You would still owe the lender $1,708.75 plus the amount of your deductible.
Rates, prices and values here are for example only. Payments use the standard loan formula, rounded to the cent.
Rolling an old loan into the new one
Say you trade in a car worth $12,000 and still owe $15,000 on it. The $3,000 difference does not go away. The dealer pays off your old loan and adds the difference to the new one. A sign that says “we pay off your trade no matter what you owe” means exactly this.
Worked example
The same car with an old loan rolled in
- Amount borrowed
- $28,000 instead of $25,000
- Monthly payment
- $504.72 instead of $450.64
- More each month
- $54.08
- More over the whole loan
- $3,893.76
That is the $3,000 you carried over plus $893.76 in interest on it. After three years you would still be upside down by $1,371.48, on the same example values as above.
Rates, prices and values here are for example only. Payments use the standard loan formula, rounded to the cent.
How to check where you stand
- Ask your lender for the payoff amount. It is not the same as the balance on your statement: it includes interest up to the day the loan would be paid, and it is good only for a set number of days.
- Find out what the car is worth. Look at more than one pricing guide, and remember a trade in brings less than a private sale. The most honest number is a written offer from a dealer or a car buying service.
- Take the value away from the payoff. If the payoff is bigger, the difference is how far upside down you are.
How to get out
- Pay extra on the principal. On the first example loan, an extra $100 a month put toward principal would pay it off after 56 payments instead of 72, with $1,767.35 less interest, on a month by month schedule. After one year you would owe $20,458.00 instead of $21,708.75.
- Keep the car longer. Every payment closes the gap. Once the loan is paid off, the car is yours and the payment is gone.
- Refinance with care. A lower rate can help. A longer term usually just keeps you upside down longer, and many lenders will not lend more than the car is worth. The lesson on refinancing shows how to compare.
- Know the cost before you roll it over. If you must trade in while upside down, ask the dealer to show in writing how much old debt is being added to the new loan, and work out what it costs you with interest.
While you are upside down, GAP coverage can pay some or all of the difference if the car is totaled. The lesson on extras at the finance desk covers when it can help.
What to do next
- Ask your lender for your payoff amount today.
- Get two or three values for your car, including at least one written offer.
- If you are upside down and can spare it, pay extra toward principal and tell the lender in writing where it goes.
- If you are shopping for a car, plan a down payment that covers at least the tax and fees.
- Use the upside down calculator to see how long a new loan would stay upside down.
Sources
Try your own numbers
Payment calculator
Your payment, the total, and how long you would be upside down.
Dealer offer X ray
The real APR, the lines you can say no to, and money the sheet hides.
Out the door price
Every fee and tax in one total, and up to three dealers side by side.
Education, not financial or mechanical advice. Have any used car checked by a mechanic you trust before you buy.