Understanding your car’s equity amount is essential if you plan to sell your vehicle or trade it in at a dealership to purchase another car. Those with positive equity built up in their vehicles generally find it easier to navigate these processes compared to those with negative equity. If you’re not well-versed in the concept of vehicle equity, you might be wondering, “What is negative equity on a car?” To put it simply, negative equity is when you owe more on your auto loan than the car is worth, which often occurs due to rapid depreciation, minimal down payments, extended loan terms, or rolling over a previous loan balance from your trade-in vehicle.
If you’re unsure about the equity amount in your vehicle, you can try calculating it by subtracting your remaining loan balance from your car’s current market value. Alternatively, various online valuation tools can provide quick equity estimates by entering brief details about your vehicle, such as its year, make, model, VIN, and license plate. In the event that your car has negative equity, you can still attempt to make the aforementioned transactions like you would with a vehicle with positive equity. It’s important to note, though, that you’d face several financial challenges, even if you’re able to find someone willing to take on your offer.
Continue reading for more information about negative equity and how it works with different types of auto financing. If you want your vehicle to have positive equity in order to successfully sell or trade it in a dealership, you can consider refinancing your car loan through one of Max Cash’sⓇ partners to access favorable loan terms that can help you accumulate equity!² ⁵
What Is Negative Equity On a Car Lease?
Many Americans nowadays are opting to lease a new car instead of paying the entire amount in cash or borrowing an auto loan to purchase the vehicle. In fact, 24% of all new car transactions in late 2024 were comprised of leasing, which is a significant increase from the 16% recorded in 2022.
There are a few causes that lead to a negative equity on a car lease, but they’re typically similar reasons you’d find with an auto loan. Choosing a more extensive lease period may depreciate your car’s value over time, and if you decide to break your lease early, this can be a concern if you want to purchase the vehicle or trade it in for a new vehicle. In the event that you break your lease, you owe the residual amount, plus the total of your remaining payments, depending on the terms of the lease. If that total is greater than the vehicle’s market value, it means the current value of your vehicle is less then the current residual on the lease.
Fortunately, you can work to avoid negative equity when leasing a car by minimizing initial depreciation through a more significant down payment, which reduces the total amount of the lease payments over time. When driving a leased car, you must check the odometer to stay within the agreed-upon mileage limits and avoid affecting the vehicle’s value. Make sure to keep the car in working condition and stay on top of regular maintenance, and avoid breaking your lease early if possible!
What Is Negative Equity On a Car Loan?
Negative equity on a car loan is when the amount you owe on your auto loan is more than your vehicle’s current value if it were sold at market price. Whether you’re financing or leasing a new vehicle, you can face similar consequences from having a vehicle with negative equity, such as higher monthly payments from rolled-over debt and a greater risk of defaulting on your payment schedule. Although leasing can often allow you to choose another vehicle without transferring any previous debt, like car loans, you won’t have the opportunity to build any equity in a leased car. Leasing focuses on paying for the car’s depreciation rather than the total value. Additionally, you won’t become the owner of a leased car or truck like you would after paying off a financed vehicle.
Keep in mind that having significant payments from rolled-over debt can result in a higher debt-to-income ratio (DTI). If you plan to apply for another loan in the future, you might have difficulties getting approved for some loan options compared to applicants who have lower DTIs. In the event that you’re unable to complete your payment obligations, you can consider selling your financed car as a means to stay afloat financially.
However, you must pay off the existing auto loan to transfer the vehicle title to the new owner, so you’ll still end up spending money one way or the other.
Take a look at different ways you can avoid having negative equity on a car loan to prevent any of the aforementioned issues during the repayment period:
- Provide a Significant Down Payment to Lower Your Monthly Payments and Reduce the Risk of Being “Underwater” on Your Loan
- Opt for a Shorter Loan Term to Pay Down Your Loan Quickly and Build Your Equity
- Purchase a Used Car to Evade a Considerable Depreciation Rate in Its First Year
- Shop for a Lender That Offers Lower Interest Rates to Focus Your Monthly Payment Towards the Principal Balance
- Choose a Vehicle with a Good Value Retention
Value retention is important, as some vehicles tend to hold onto their value less than others over the years. For example, Tesla cars typically retain their value for a long time after the initial purchase because their batteries can potentially exceed 500,000 miles. If you don’t have the money to afford a Tesla, though, you can opt for much cheaper alternatives that hold their value, like Toyota RAV4 Hybrids and Kia Rios. Whichever vehicle you’re interested in, consider purchasing a car that can decrease its value slowly over time to avoid having negative equity on your auto loan.
What Is The Average Negative Equity On A Car Loan?
According to recent data from Edmunds, the average amount owed on a car loan with negative equity reached a record level of $6,905 in the third quarter of 2025. What’s even more alarming is that nearly one in three borrowers with “upside down” auto loans owes between $5,000 and $10,000 in debt, marking another record high that has climbed steadily since the second quarter of this year.
Analysts claim that the major reasons behind this massive spike are due to consumers trading in vehicles more quickly and taking out loans during the pandemic when car prices were at a peak. Although rolling over negative equity into a new car is a solution to prevent being “underwater” on your loan, the average monthly payment for people who made that decision was $907 in Q3.
Experts suggest that borrowers in that situation should consider waiting to sell their cars as a way to get out of their loans. An individual should cover most of their loan payments as much as possible before they decide to sell or trade in their vehicles. If you haven’t taken out an auto loan yet, it is recommended that you shop around to find a reliable lender that can provide convenient loan terms. Ensure you read the fine print in the loan contract to avoid any penalties or fees that can prolong the repayment process and depreciate your car’s value quickly.
How Does Negative Equity Work When Trading a Car?
Trading a vehicle with negative equity is an option to consider if you’re looking to get a new car. Some dealerships claim they’ll pay for the remaining balance in your previous loan, but you must verify this with a representative first before you settle on a deal. In various instances, dealerships will simply roll over the negative equity into your new auto loan, which you’ll have to pay off after getting the car. You can often detect when the negative equity in your vehicle affects your monthly payments by reviewing the details of the down payment and the amount financed on your agreement.
If you’re thinking about getting another car, you may be hesitant to trade in your vehicle if it currently has negative equity. However, if you have the money to pay the difference between what you owe and the trade-in value, you can avoid a challenging repayment process by reducing the new loan amount, minimizing the overall interest you’ll pay, and building positive equity over time. If you don’t have the funds to pay off your car’s negative equity, you can wait to trade it in until you’ve paid down your existing loan and your vehicle has positive equity. You can also sell the car privately to get a better offer, choose a less expensive vehicle to get a smaller loan amount, or negotiate your new loan for the shortest payment schedule that fits your budget.
It’s also worth noting that you can speak with a dealer for information about how they’ll implement your vehicle’s negative equity into your loan contract. You can ask them about the fees and interest you’ll face during the repayment period and what to expect as a borrower. Don’t be afraid to go over your loan agreement with the dealer to ensure you understand all of the terms of your payment schedule. If the monthly installment payments are too much to handle, you can consider the aforementioned options to buy a new car.
How Can I Get Rid of Negative Equity on a Vehicle?
The consequences of having negative equity on a vehicle are difficult to ignore. Whether you plan to sell / trade in your car or roll over the negative equity to a new auto loan, you can face several challenges that can leave you in a tough financial position. Additionally, you can negatively impact your credit score if you have problems covering your monthly payments and miss or are late with your due dates. A lowered credit score can affect your chances of borrowing money through a loan and other types of credit in the future.
Thankfully, you can use several strategies to get rid of negative equity on a car. If you can afford to wait a while until you can sell or trade in your vehicle, you can consider the following methods to avoid a financial strain:
- Make Extra Payments Each Due Date to Reduce the Amount You Owe Faster
- Sell the Car to a Private Seller and Use the Money to Cover the Remaining Balance
- Refinance Your Loan with a Lender That Offers Better Loan Terms and Optimal Interest Rates
- Keep Your Vehicle for a Long While Until Its Depreciation Slows Down
- Pay the Loan Off By Making Regular Payments if You Don’t Need to Get Out of Your Loan Quickly
Regardless of the technique you choose to eliminate negative equity, you may be able to expect a smooth sale or trade-in once you have everything in order. If you want a different way to get rid of negative equity on your car, consider talking with your current lender about options they can offer to help you in your situation.
Can You Trade In a Car You Owe Money on?
Yes, you can trade in a car if you still owe money on your existing loan. Many dealerships are willing to take your vehicle regardless if it’s paid off or not, but the process that follows will depend on your car’s available equity. If your vehicle has positive equity, the dealer will handle your loan payments and apply the remaining balance as a down payment towards your new car. In the event that you have negative equity, though, you must typically pay the difference between the loan balance and the trade-in value, or roll over the negative equity towards your new auto loan.
As mentioned previously, rolling over the negative equity may result in a significant monthly payment that can be difficult to afford. If you’re considering paying the difference when trading in a vehicle with negative equity, you can consider paying out the amount in cash to avoid rolling the negative equity into a new loan. However, if you don’t have sufficient funds to make a lump sum payment, you can try negotiating for an affordable payment with the dealership. Or, you can simply hold off on buying a new car by paying down your current loan and improving your equity to access a convenient trade-in process.
Consider Refinancing Your Auto Loan
While refinancing a car loan with negative equity is generally difficult, it is still an option to consider if you can find a different lender that offers convenient loan terms. When choosing this strategy, you must first compare your available options to find a lender that can provide more competitive interest rates and an affordable monthly payment. Don’t forget to opt for a shorter repayment term to pay down your loan quickly and work to boost your equity to a positive standing over time.
