Am I upside down on my car loan?

Key takeaways

• You’re upside down if your payoff amount > current market value.
  
• The fastest way to check is: Payoff − Value = Negative equity.
  
• The safest “fix” is usually paying down faster and keeping the car longer, then refinancing if the numbers work.

Being upside down (or underwater) on a car loan means you owe more on the loan than the car is worth today. For example: If your car is worth $20,000 but your payoff amount is $25,000, you have $5,000 in negative equity.

And you’re not alone. In Q4 2025, 29.3% of trade-ins toward new-vehicle purchases had negative equity, with an average underwater amount of $7,214—an all-time high.

How to calculate if you’re upside down (3 steps)

Step 1: Estimate your car’s current market value

Use at least two sources, and be honest about condition and mileage. Look at:

• Trade-in value (what a dealer might offer).
• Private-party value (what you might get selling it yourself).

Tip: If you’re deciding whether to sell vs. trade in, private-party value is usually the more relevant number.

Step 2: Get your loan payoff amount (not just your balance)

Your payoff is what it takes to fully close the loan as of a specific date. It can be different from your current balance because of interest through the payoff date (and sometimes fees).

Step 3: Do the math (equity = value − payoff)

Use whichever value matches your situation (trade-in vs. private sale).

Formula:

• Equity position = Car value − Loan payoff
• If the result is negative, you’re upside down.

Example:

• Car value: $18,000
• Loan payoff: $25,000
• Equity position: $18,000 − $25,000 = −$7,000 (negative equity)

Quick table: what your number means

Scenario	Car value	Loan payoff	Equity
Positive equity	$25,000	$20,000	+$5,000
Break-even	$22,000	$22,000	$0
Negative equity	$18,000	$25,000	−$7,000

What to do next (choose the path that fits your timeline)

If you plan to keep the car at least 1–2 years:
Focus on paying down principal faster, then consider refinancing if you can lower the rate without stretching the term.

If you need to sell or trade soon:
Your goal is minimizing how much negative equity you carry forward. That often means private sale + paying the gap (at least partially) out of pocket.

If you’re worried about a total loss (accident/theft):
Consider GAP coverage so you’re not stuck paying a big difference if insurance pays less than your loan balance.

Why so many drivers are upside down right now

A lot of the spike comes down to a perfect storm: higher prices, longer loans, and people trading in before the loan catches up to the car’s depreciation.

One industry report found that in Q4 2025, the average negative equity on underwater trade-ins hit $7,214, and 27% of underwater trade-ins carried $10,000+ in negative equity.

Here are the most common causes:

Rapid depreciation (especially early in ownership)

Cars typically lose value fastest in the first years. If your loan balance is still high early on, it’s easy to fall behind.

Small (or zero) down payment

No down payment can mean you start ownership with little cushion—especially after taxes, fees, and add-ons.

Long loan terms (72–84 months)

Long terms lower your payment, but they also slow down principal payoff. In one recent snapshot, more than 22% of borrowers chose 84-month loans (7 years).

High interest rates

Early payments can be interest-heavy, which means your balance drops more slowly.

Rolling old negative equity into a new loan

This is the “debt snowball” effect. If you trade in while upside down and roll the difference into a new loan, you can start the next car already underwater.

In fact, the same Q4 2025 report found buyers who rolled negative equity into a new loan had record-high average payments ($916 vs. an overall average of $772) and financed $11,453 more than typical buyers.

Why negative equity matters (and when it becomes a real problem)

Negative equity doesn’t directly hurt your credit score. Missing payments does.

Where it does matter is when you need to make a big move:

If you want to refinance

Many lenders have loan-to-value (LTV) limits. If your balance is too high relative to the car’s value, refinancing options can narrow quickly—especially if the car is older or has high mileage.

If your car is totaled or stolen

Insurance typically pays the car’s actual cash value, not what you owe. If you owe $25,000 and the car is worth $20,000, you may have to cover the $5,000 difference—unless you have GAP coverage.

If you want to sell or trade in

You generally can’t transfer the title until the loan is paid off. If you’re underwater, that often means bringing cash to close—or rolling the balance into the next loan (which can keep you underwater longer).

5 ways to get out of an upside-down car loan

Comparison table

Strategy	Timeframe	Cost	Credit impact	Best for
Extra payments	12-24 months	Variable	None	Those with extra cash flow
Refinancing	Immediate-12 months	Minimal fees	Slight dip (via hard pull)	Improved credit scores
GAP	N/A (protection only)	$399-800	None	Recent purchases, high LTV
Strategic sale	1-3 months	Payoff gap	Positive (debt reduction)	Need to exit loan
Keep Vehicle	24-48 months	None	Positive (on-time payments)	Stable financial situation

1) Make extra principal payments (best all-around move)

Even an extra $50–$100/month can help you outpace depreciation over time.

How to do it (quick checklist):

1. Confirm with your lender that extra payments go to principal.
2. Set up a recurring extra payment (same day as your normal payment).
3. Use “windfalls” (tax refund, bonus) for a principal-only payment.
4. Recalculate your equity position every few months.

Pros

• Low risk
• Reduces total interest
• Improves your LTV (helps with refinance later)

Cons

• Takes time (often months, not weeks)
• Requires cash flow

2) Refinance (if it lowers your total cost, not just your payment)

Refinancing can help if:

• Your credit improved since you took the loan.
• You can get a meaningfully lower rate, monthly savings, or both.
• You’re not too far underwater (or you can pay down enough to qualify).

3) Add (or confirm) GAP coverage to protect yourself

GAP coverage doesn’t erase negative equity, but it can protect you from a worst-case scenario: losing the car and still owing thousands.

Most GAP policies cover the difference between your loan balance and the car’s value in a covered total loss (often with exclusions, and typically not your deductible).

When GAP tends to be most useful

• Minimal down payment
• Long loan term
• You’re already underwater (or close)

4) Sell strategically (private sale can reduce the gap)

If you need out, a private sale may net more than a dealer trade-in—meaning less negative equity to cover.

Reality check: If you’re underwater, you’ll still need to cover the remaining loan balance to release the title. But getting a higher sale price can make that gap smaller.

5) Keep the car longer (often the most financially efficient “fix”)

Not glamorous, but effective: depreciation slows as cars age, and your loan balance keeps dropping. Many people regain equity simply by holding off on trading in.

This aligns with broader consumer guidance as negative equity has become more common.

A quick “what not to do” list

• Don’t roll large negative equity into a new loan unless you’re also paying down most of the gap and buying a meaningfully cheaper vehicle.
• Don’t extend your term just to lower the payment if it increases total interest and keeps you underwater longer.
• Don’t guess at your payoff—get the real payoff quote so your math is accurate.

How to avoid negative equity next time

• Put down as much as you can (many experts aim for ~20% when possible).
• Keep terms reasonable (long loans are a big negative-equity trigger).
• Avoid rolling old debt into the next car.
• If you’re financing with low money down, consider GAP early.

Bottom line

Being upside down on a car loan means you owe more than your vehicle is worth, but it doesn’t have to be permanent. The key is knowing your numbers: get an accurate payoff amount, compare it to your car’s current value, and choose a strategy that fits your timeline and budget.

For most drivers, the safest path out of negative equity is keeping the car and paying down the loan faster, then refinancing only if it meaningfully lowers the total cost. Selling or trading in while underwater can work, but it often requires cash upfront and carries the risk of rolling debt into the next loan. And if you’re early in the loan or have a high balance, GAP coverage can protect you from a worst-case scenario without fixing the equity itself.

Going forward, negative equity is easiest to avoid with larger down payments, shorter loan terms, and patience between trades. Do the math before making a move—and if the numbers don’t work today, time and steady payments are often your best allies.

FAQs: Am I upside down on my car loan?

Can I refinance if I’m upside down?

Sometimes. Options depend on your credit, vehicle details, and your loan-to-value ratio. If you’re deeply underwater, paying down some principal first can open up more refinance paths.

How long does it take to get right-side up?

Often 18–36 months, depending on rate, term length, depreciation, and whether you’re making extra principal payments.

What happens if my upside-down car is totaled?

Your auto insurer typically pays the vehicle’s value, and you’re responsible for any remaining loan balance, unless GAP coverage applies.

Does being upside down hurt my credit?

Not directly. But it can increase financial strain, which raises the risk of missed payments. Those do hurt credit.