What To Do When Upside Down on a Car Loan

It doesn’t take long after you buy a car for it to be worth less than what you owe. Owing more than the vehicle is worth is known as “being upside down” on the car loan.

Vehicles lose 20% of their value as soon as they’re driven off the lot. In a few years, they’ve lost 50%. Depending on how much your down payment is, you may be upside down before you get to the first stoplight after you drive off the lot.

The average price for a new car in 2024 was $47,542, which means you’d need a down payment of $9,500 to avoid immediate negative equity. The average vehicle loan in 2024 was $40,927, and the average monthly payment was an eye-popping $734, which means that a lot of buyers are underwater on a pretty expensive item.

Let’s take a look at what to do if you’re upside down on a car loan, as well as how to avoid it in the first place.

What is an Upside-Down Car Loan?

An upside-down car loan has a balance higher than what the car is worth. What it means to you is that if you sell the car, the amount you get for it may not cover the balance of your loan. If you’re in an accident and total the car, the insurance payment will be for the car’s value, not what you owe. Or if you have to sell the car immediately, for some reason, you won’t get enough to cover your loan. In either case, the bank will want the rest of the money immediately.

People sometimes refer to their car as an investment, but it’s not. A car is not a house, or fine wine – things that increase in value if you take care of them. When you buy a new car, no matter how well you treat it, it will deteriorate. You can make a car last, but if you bought it new, it will not increase in value. Unless you’re a car restorer, the car you buy will never be worth what it was when you drove it off the lot.

“The best financial move for people is to buy a car and drive it well past the point where you have it paid off,” said Jessica Caldwell, a senior analyst at Edmunds, an automobile information and resource firm. “Unfortunately, the trend is that less and less people are doing that now.”

About one-quarter of car owners in 2024 were upside down on their loans, and one-quarter of those owed more than $10,000.

If your negative equity is high, look into buying gap insurance to cover the difference between an insurance settlement and what you owe on the loan in case you get into an accident.

How You End Up With an Upside Down Car Loan

Let’s face it, getting a new car is exciting. Unfortunately, excitement and financial smarts don’t always go hand-in-hand. Excitement can result in an upside-down car loan in many ways.

• Inadequate research: Many consumers don’t do enough research on the cost of similar models. If you buy a car with a sticker price of $30,000 and similar models are selling for $27,500, you are already upside down on your new car.
• No-money-down loans: Cars depreciate 20% immediately and lose 50% of their value by the third year, so the less money down, the more upside down you will be.
• Long-term loans: Terms of 72 or 84 months allow you to keep monthly payments manageable, but you also end up paying for a car that’s five or more years old. Payments for that long can’t keep pace with depreciation.
• Roll-over loans: The dealer may roll the negative equity on your old car into your new car loan when you trade it in. This means you’re paying more than what the new car is worth from the start.
• Unnecessary options: Don’t be talked into options you don’t need or won’t use. Options create more debt and it’s impossible to recoup their cost when you sell the car.
• Expensive car: Buying a car that stretches you to the limit of what you can afford will compete with other necessary payments, like housing, food, utilities, student loans, and more.
• High-interest loans: Plan your financing before you go to the car lot and don’t give in to pressure to go with dealer financing at a higher interest rate.

 7 Ways to Get Out of an Upside-Down Car Loan

So, what’s the solution when you find yourself upside down on a car loan?

If you can’t make car payments and are upside down, it’s vital to talk to your lender ASAP. If the lender doesn’t have any options to offer, talking to a nonprofit credit counselor may help. Credit counselors at nonprofit agencies – those accredited by the National Foundation for Credit Counseling – will talk to you at no cost, reviewing your finances, helping you budget, and suggesting options to help decrease your debt.

If you’re still able to make payments and haven’t totaled your car in an accident or have to sell in a hurry, there’s good news. There are ways to get out of an upside-down car loan.

1. Calculate Negative Equity

To calculate negative equity on your car loan:

• Determine your car’s value using Kelley Blue Book and Edmunds online calculators.
• Find your balance on your account online, or call the lender and ask. Keep in mind that the pay-off figure changes daily because of interest accumulation.
• Subtract the value from what’s owed.

The final amount is the negative equity. For example, if you owe $17,000 and the value is $11,000, negative equity is $6,000. If you sold the car for $11,000, you’d still owe the lender $6,000.

2. Contact Your Lender

Once you’ve calculated the negative equity, discuss options with your lender. Don’t feel uncomfortable about having the conversation. Your lender doesn’t want to lose money on the loan, so they want a solution, too. They may offer refinancing or another option. Even if they don’t have any options to offer, it’s still good to make contact, find out where you stand, and let them know you’re working on the issue.

3. Continue Making Payments

Your immediate priority is to keep making on-time payments on your vehicle loan. This continues to pay it down, lowering the balance and increasing equity, as well as protecting (or improving) your credit score. The better your credit score, the better the loan terms you’ll get on your next car loan.

4. Make Extra Loan Payments

If you can afford it, pay extra toward the principal on your loan. Before you do, though, check whether there’s a fee for early payoff. Even with a fee, paying down the loan faster may be worth it, as it decreases the balance much faster and builds equity. Do the math and determine what’s best.

If you plan to use savings to pay off the loan, make sure it won’t have an impact on your next car loan down payment. If you expect to have the car for a while, an early payoff means you’ll have more each month to put into savings for a down payment. Do a budget and figure out the short-term and long-term benefits of an early payoff.

5. Refinancing an Upside-Down Loan

If you can get a lower interest rate, refinance your car loan with a new loan. The lower interest will lower your monthly payments. The best option for car loan refinancing is a community bank or credit union, which offers lower interest rates and is more flexible than large lenders.

Homeowners may find that a home equity loan is a good option if the interest is lower than the car loan interest. Another option is a 0% interest credit card. If you transfer your car loan balance to one and don’t pay it off when the 12-18 month introductory period ends, you’ll have to refinance the remaining balance with a debt consolidation loan or another low-interest solution or you’ll pay much higher interest that you would on a loan.

6. Selling Your Upside-Down Vehicle

You may want to sell if you’re hopelessly upside down on a car loan. Since selling the vehicle won’t cover what you owe, you also need a solution to pay the balance after the sale. The car will belong to someone else, not the lender, so you’ll have to pay the rest of what you owe immediately.

To sell the vehicle to get out of an upside-down loan:

• Determine negative equity.
• Determine how you’ll pay off what you owe after the sale. Options may include an unsecured personal loan (though this may be hard to get without collateral) or without a good credit score), family help, credit card, or borrowing against your 401(k). All have drawbacks, so consider them carefully before jumping in.
• Research whether a private sale, rather than selling to a dealer or trading in, will net you more money.
• After selling, consider using public transportation if it’s an option, rather than replacing your car immediately. The savings will help you pay off the loan or credit card you used to pay the balance or go toward a down payment.

7. Voluntary Surrender

A last resort for getting out of an upside-down car loan is to voluntarily surrender the vehicle to the lender, especially if you can’t make car payments. Doing this has a significant negative impact on your credit score, which will make it harder to get loans in the future, as well as credit cards. That said, it’s a better option than a repossession by the lender, since you avoid costly repossession fees. To voluntarily surrender, call your lender to arrange the details. The lender will sell the car, and you’ll still owe the balance that’s left on your loan.

How to Avoid an Upside-Down Car Loan in the Future

The best way to avoid a car loan that you can’t afford is not to get one to begin with. Before you buy a car, research the cost of options, financing, taxes, and the best value on the make or model that you want. Many car models come with different versions that range from basic and pared-down to expensive ones with a lot of extras. Figure out what you need and don’t need before car shopping.

Your research may make it clear that your best option is a used car. Late-model used cars with low mileage make good financial sense. The original owner will have paid the price for depreciation in the first year, so the purchase price should be at least 20% off the original cost.

Used car loans often come with higher interest than those for new cars, but calculate the costs. You’ll still likely have a lower monthly payment and a shorter loan term.

The price tag for the car is not the only cost, so take into account other monthly costs, including interest, taxes, whether it uses more gas, and if it will mean a higher car insurance premium.

If you buy new, use the 20-4-10 rule. Make sure that a 20% down payment, 4-year (or less) loan and the monthly car payment, plus insurance, isn’t more than 10% of your gross income. If you can’t make the numbers work, look at used cars instead.

Tips to Help Avoid an Upside-Down Car Loan

Whether buying a used car or a new one, the following tips can help you avoid an upside-down car loan:

Taxes and Fees: Pay taxes and fees upfront when you buy the car rather than rolling them into the loan.

Repayment Plan: Choose the shortest repayment term you can afford. The interest will be lower and the loan will be paid off faster. For example, borrowing $25,000 for three years at 3.5% interest (with a credit score of 661 or higher) will cost $1,372 in interest over the life of the loan. Over four years it’s $1,827. A five-year loan will cost $2,287. The lower your credit score, the higher the interest. A credit score between 601 and 660 carrying a 6.07% interest rate means $2,408 in interest over a three-year loan; a five-year loan would cost $4,048. The average borrower in 2022 had a 60-month loan of $39,340, at 5.2% interest, for $5,420 in interest costs.

Down Payment: Make a down payment of at least 20% to equal the immediate depreciation.

Depreciation: Research values on Kelley Blue Book, Edmunds, and Consumer Reports to find out which models retain value. This will keep you from overpaying and ensure you have a car that’s worth more when you sell it or trade it in. It will also help you find cars that are known for longevity and low maintenance costs. If you plan to keep the car longer than the life of the loan, you want one with staying power. You may be underwater at first, but you’ll build equity as you pay down the loan without throwing a lot of money into the car.

Keep the Car: There’s no law that says you have to get a new car every few years. Not having a car loan will free up your budget so you can save for a big down payment on the next one, as well as help you pay other bills. Keep up with regular maintenance and keep the car clean and in good condition so it won’t cost you a lot for maintenance and repairs in its twilight years. It also will help maintain value if you plan to sell it. This includes frequent winter car washes to remove salt, sand, and road treatment chemicals that damage a car’s undercarriage and body if you live in a cold weather state.

Leasing or Buying: If you plan to keep a car for less than three years, consider leasing instead of buying. A lease means no loan, which means you can’t be upside down. Be sure you’re clear on the provisions of the lease – if you drive a lot, mileage costs may make it more expensive than buying. There also may be other fees that you’ll have to pay once the lease is up.

Incentives: Look for dealers that offer cash incentives that make up the difference of the 20% depreciation.

Pay Off: Pay off your car loan before you sell or trade it in.

Increase your Credit Score: Take the time to improve your credit before applying for a loan. The higher your credit score, the better loan terms you’ll get, so the less the loan will cost. On-time payments, lowering your debt load and not applying for other credit will all increase your credit score over time.

Loans for Bad Credit: If you have bad credit and need a car loan, shop for a personal loan with online lenders, a credit union, or look into a home equity loan. They may have lower interest rates than a dealership.

Using a Car With Negative Equity as Trade-In

If you’re considering trading in a car with negative equity, don’t end up with even more with the new loan.

Trading in a car with negative equity and rolling what you already owe into the new loan means you will owe more than the new car is worth before you even sit in the driver’s seat.

For instance, if you owe $7,000 on a car that’s worth $5,000, the dealer will credit you $5,000 for the trade-in and add the remaining $2,000 to the new loan. That means you’ll start off owing $22,000 on a $20,000 car.

Find a way to eliminate negative equity before the trade-in. Pay it off with a personal loan, money from a home equity loan, or some other source that has a lower interest rate than the car loan (or no interest). If you can’t pay the full sum, pay as much as you can to lower what you owe.

If you can’t afford to eliminate the negative equity, consider keeping the car rather than getting another one. Find ways to cut monthly expenses so you can afford the payments and, if possible, pay more toward the principal, increasing your equity until you can make a better deal on a new car.

Caldwell, of Edmunds, said. “Unless there has been a substantial change in your life circumstances – you’ve started a new construction business and now you need a truck; or you just had triplets and now you really need a mini-van – to have a new car loan and negative equity in your trade-in does not put you in a good place financially.”

Debt Relief Options to Consider

If you are so far in debt that strategies for getting out from under a car loan don’t apply, particularly if you can’t afford your monthly payment, consider debt relief options. They range from seeking credit counseling to declaring bankruptcy. It all depends on your financial situation and how much debt you have.

It’s a good idea to talk to a credit counselor from a nonprofit credit counseling agency before you decide how you’re going to tackle your debt. A credit counselor will review your finances and help you determine a budget, as well as discuss the pros and cons of various debt relief options. A situation that may seem impossible and overwhelming may become much more clear after such a discussion. Talking to a counselor at a nonprofit debt agency is free, and can be the first step to getting out from under a car loan you can’t afford, as well as other debt.

Debt relief options that a credit counselor may suggest include:

• Debt Consolidation: You combine your car loan with other debts into one large loan. The new loan typically comes with lower interest rates and better repayment options.
• Debt Management Plans: A credit counselor works with creditors of your unsecured debt to waive fees and lower payments. Car loans aren’t eligible, since DMPs are only for unsecured debt, it will help manage your other debt, making it easier to pay your car loan or freeing up money to pay down the balance.
• Debt Settlement: You — or a settlement firm working on your behalf — negotiates with your creditors to have your balances reduced to an amount that you can pay off. Fees, credit-score impact and tax implications are all things you must consider if you choose this option.
• Bankruptcy: If you are in such serious debt that you see no way out of it, you may consider filing for bankruptcy, which can clear all or most of your debts. It will also have an impact on your credit score and your ability to borrow in the future, and should only be a last-resort choice.

Upside down on a car loan isn’t a great place to be, but you don’t have to stay there. You are in control of  your finances, no matter how dire they may seem. Take steps to put yourself in a better financial position and it will pay off in ways that go way beyond your current financial challenges.