Upside-Down Car Loan: When You Owe More Than the Car Is Worth

How to tell if you are upside down

1. 1 Get the payoff amount from your lender. It can differ from the balance on your statement because of how interest is figured, late fees or other charges.
2. 2 Estimate the car's value. Check a used-car pricing guide for trade-in and private-sale values, or get a written offer from a dealer or car-buying service.
3. 3 Subtract. Value minus payoff is your equity. A negative number is the amount you are upside down.

Use the trade-in value if you plan to trade at a dealer and the private-sale value if you plan to sell the car yourself. Trade-in offers vary, so the CFPB suggests checking value guides and comparing offers from several dealers.

Why loans go upside down

• Fast early depreciation. A car often loses value faster than a long loan's balance falls in the first years.
• Long terms. On a 72- or 84-month loan, more of each early payment goes to interest. Compare terms with the loan term comparison.
• Small or no down payment. You start with a balance close to, or above, the price.
• Financed extras. Taxes, fees and add-ons such as service contracts raise the loan without raising the car's resale value.
• Negative equity from a previous car. Rolling an old shortfall into a new loan starts you underwater on day one.

What rolling negative equity costs

When the Consumer Financial Protection Bureau studied about 21 million car loans made from 2018 through 2022, it found that 11.7% of those loans carried rolled-over negative equity. The average amount rolled into the new loan was $5,073 on new cars and $3,284 on used cars. Those borrowers took larger and longer loans than other buyers, and their loans were more likely to go bad.

The CFPB also found that within two years, borrowers who rolled over negative equity were more than twice as likely as buyers who traded in a car with positive equity to have their loan sent to repossession.

When you trade in a car you are upside down on, the dealer pays off the old loan and adds the shortfall to the new one. The math below uses a $30,000 car financed at 7% APR for 60 months, with and without $4,000 of negative equity added.

You pay about $79 more a month, $752 more in interest, and you start the new loan owing more than the new car is worth. Our page on trade-ins and negative equity shows where the rolled-in amount appears on the contract.

If a dealer promises to "pay off your trade no matter what you owe," look for the shortfall in the amount financed on the new contract before you sign. After the deal, wait about a week and call your old lender to confirm the loan was paid off. If it was not, contact the new lender, and if that fails, complain to the FTC, the CFPB or your state attorney general.

Your options when you owe more than the car is worth

If you are also behind on payments, read what to do when you fall behind before you decide.

GAP coverage if the car is totaled

If an upside-down car is stolen or totaled, your insurer pays what the car was worth, not what you owe. You remain responsible for the difference. Guaranteed asset protection, or GAP, covers that difference, minus any limits and exclusions in the GAP contract.

GAP is optional; if a dealer says you must buy it to get the loan, check the contract or ask the lender. Dealers often sell it, but your own auto insurer or a direct lender may offer it too, and prices vary a lot. Financing it into the loan raises the balance and the interest you pay. It stops being useful once your balance falls below the car's value. You can cancel optional add-ons, and you may be due a refund if you sell, refinance or pay off the loan early. Our guide to GAP and service contracts covers the details.

Questions people ask