How to Get Rid of Negative Equity on Your Auto Loan

If you’ve found yourself in a situation where you owe more on your car than it’s worth, you’re not alone. It’s called negative equity, or being “upside down” on your loan, and it’s an increasingly common issue, especially for people who bought vehicles at peak prices when interest rates were high.

Understanding Negative Equity

This can happen for a few key reasons:

• Depreciation: Vehicles lose value over time, and some models depreciate faster than others.
• High Purchase Prices: If you bought when used car prices were at their peak, you may have overpaid.
• High Interest Rates: A high APR means more of your payment is going toward interest rather than the principal.
• Low or No Down Payment: Without putting money down, you start your loan with little to no equity.

Being upside down on your car loan can be frustrating, but there are ways to manage it strategically.

How to Get Out of Negative Equity

1. Refinance to a Lower Rate

One of the fastest ways to improve your situation is by refinancing your auto loan. By securing a lower interest rate, you can reduce your monthly payment and free up cash flow.

If you keep making the same payment after refinancing—applying the savings toward your principal—you can pay down the negative equity faster. Caribou can help you compare multiple lender offers to find the best refinance option for your situation. Find out how much customers with your vehicle are saving and check out the Refinance Calculator to estimate how much you could save by refinancing.

2. Make Extra Payments Toward the Principal

If refinancing isn’t an option, consider making extra payments specifically toward the principal balance of your loan. Even small additional payments each month can help chip away at the negative equity faster, shortening the time you’re upside down.

3. Protect Yourself with Guaranteed Asset Protection (GAP)

Guaranteed Asset Protection (GAP) can be a game-changer if you’re carrying negative equity. If your car is totaled in an accident or stolen, GAP covers the difference between what your car is worth and what you still owe—ensuring you won’t have to pay out of pocket for a loan on a car you no longer have. Caribou makes it easy to add GAP coverage to your loan for peace of mind.

4. Consider a Vehicle Service Contract (VSC)

Unexpected repairs can make a tough financial situation even worse. If you’re already struggling with negative equity, a costly engine or transmission repair could put you even further underwater. A Vehicle Service Contract (VSC)—often called an extended warranty—can help cover major repair costs, allowing you to keep your vehicle longer without added financial stress. Plus, if you originally purchased a VSC through your auto loan, refinancing may allow you to cancel it and receive a partial refund, giving you even more financial flexibility.

5. Trade In Your Car (With Caution)

If your vehicle no longer meets your needs, trading it in might seem like an option—but proceed with caution. Rolling negative equity into a new loan often worsens the situation, as you’ll be paying retail for the next car while carrying over existing debt. Instead, if you truly need a new vehicle, consider leasing. Leasing can help you manage payments while giving you a fresh start after 2-3 years, without compounding negative equity in another long-term loan.

The Bottom Line

If you’re stuck in negative equity, you have options. Refinancing, making extra payments, and protecting yourself with GAP and a VSC can help you regain control of your financial situation. At Caribou, we’re here to help you find a better loan, lower your monthly payments, and provide coverage options that protect your investment.