Understanding an upside-down car loan and the options for changing vehicles

What is an upside-down car loan?

An upside-down car loan is a situation in which you simply owe the lender more than the vehicle is worth.

For example, you still have $12,000 outstanding on your auto loan, but the vehicle’s value is just $9,000, so you’re upside down by $3,000.

It’s also known as negative equity or being “under water,” and it’s a growing problem in the U.S., according to Debt.org, a debt help organization.

How an upside-down car loan might occur

There are numerous ways negative equity on a vehicle may arise. Common scenarios include:

  • Depreciation– Cars inevitably lose value once they’ve been purchased, and new cars depreciate by about 20 percent as soon as they’re driven off the dealer’s lot. By year three, they are reckoned to have lost 50 percent of their value. That’s a large chunk, and this may be a factor in an upside-down car loan, when, over just a few years, the money owed on the auto loan becomes greater than the vehicle’s market price.
  • Small or no down payments– Seeing as new cars depreciate quickly, and could lose a fifth of their value on exiting the dealer’s driveway, putting little or no money down to reduce the loan amount at the start may be a factor that leads to an underwater loan. And that sinking feeling.
  • Long loan terms– A lengthy loan term might mean car payments are being made at a slower rate than the depreciation of the vehicle’s value.
  • Rollover loans– A rollover loan may take place when you’re buying a new car but still owe money on your current vehicle. The debt on the existing loan is added, or rolled over, into the loan for the new car. This will increase the total loan amount and may result in negative equity if the loan value is greater than the value of the new car you’re buying.
  • Overpaying for a car– Paying above the market price for a vehicle might inflate the loan amount needed to buy the car, and is another possible factor in an upside-down auto loan.
  • Add-ons – Optional extras on a new vehicle like leather seats, or add-ons such as GAP insurance and service contracts, can mount up, increasing the cost of your purchase and, potentially, the size of your debt.

How to get out of an upside-down loan, and the options for changing vehicles

If you want to get out of an upside down situation, change vehicles, or both, what are the options? The Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) offer some straightforward advice to help with the main choices.

Waiting, and buying
First of all, check the value of your current vehicle to see exactly where you stand financially, says the FTC, and consider waiting until you’ve paid back enough of your auto loan to the point where you have positive equity, and owe less than your vehicle’s value.

This process could be speeded up by making extra payments that go completely toward paying down the principal loan amount, rather than to interest charges. You can read more about paying off a car, and the roles of interest and principal, in our articles about how early payoffs and auto loans work.


Selling your car yourself is an option, and may get you a higher price than trading it in to a dealership.

Trading in 
If you do decide to trade in your vehicle, which is a common choice, there are a number of things to be aware of that may help.

A dealer might promise to pay off your current loan upon trading in, but when you have negative equity, it may not be entirely paid off, cautions the FTC.

“Make sure you understand how your negative equity is being treated before you sign a contract,” it says, and find out if it is being rolled into the new loan, and what the terms will be, including monthly payment. The length of the loan is also important as a longer loan term means it may take more time to reach positive equity, and turn from upside down to right side up.

In general, rolling the balance of your current auto loan into a new one could make that new loan much more expensive, says the CFPB, and may increase the chance of negative equity on your new car.

When you’re ready to purchase your next vehicle, apply for financing online with RoadLoans, the direct-lending platform of Santander Consumer USA.

Apply for a car loan and get an instant decision.

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