Upside-Down Car Loan: How to Get Out of Negative Equity
Figures checked October 27, 2026 against primary sources
Your car loan is "upside down" when you owe more on it than the car is worth. The gap is called negative equity. It is common, it is usually fixable, and it only turns into a real problem when you need to get rid of the car: to trade it in, to sell it, or because it was totaled or you can no longer make the payments. This guide shows how to measure your gap, why it opens up, what it costs to roll it into your next loan, and the realistic ways out, using research and guidance from the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC).
The Short Answer
- Negative equity = loan payoff amount minus the car's value. Get the exact payoff figure from your lender, not the balance on your statement.
- If you can keep the car, the gap usually closes on its own as you pay the loan down. Extra payments toward principal speed that up.
- Rolling the gap into your next car loan does not erase it. You pay interest on it again, often on a longer loan, and start the new loan further underwater.
- It is common. In the CFPB's study of 2018 to 2022 loans, 11.6% of all vehicle loans included negative equity, averaging $5,073 on new-car loans.
- Voluntary repossession does not wipe out the debt. The FTC says you still owe the difference between your loan and what the car sells for, and it can still show up on your credit report.
How to Check If You Are Upside Down
You need two numbers.
- Your payoff amount. Ask your lender or servicer for it, or look for it in your online account. The CFPB points out that the payoff amount can differ from the balance on your statement, because of how interest is calculated, unpaid late fees or other charges.
- What the car is worth. Check a few pricing guides for both the trade-in value and the private-sale value, and look at local listings for the same model, year and mileage. A dealer's actual offer is the number that counts if you plan to trade in, and offers from different dealers can vary, so get more than one.
Then subtract: payoff amount minus value. A positive result is your negative equity. If you owe $22,000 and the best offer is $18,500, you are $3,500 upside down. A negative result means you have equity you can put toward your next car.
Lenders look at the same gap as a ratio. The CFPB defines the loan-to-value ratio (LTV) as the loan amount divided by the vehicle's actual cash value. Anything over 100% means you owe more than the car is worth.
Why Car Loans Go Underwater
- Depreciation comes fast. The CFPB notes that a new car's value drops sharply the moment you take ownership, and depreciation slows only after the first two to three years.
- Loan balances fall slowly at first. On a standard amortizing car loan, early payments go mostly to interest, so the principal shrinks slowly in the first years and faster near the end. Early on, the car loses value faster than the loan shrinks.
- Long terms. A longer loan means smaller principal payments each month, so the balance trails the car's value for longer. Experian's average term in Q2 2026 was 69.5 months for new cars and 67.9 months for used ones.
- Little or nothing down. A down payment gives you a cushion from day one. Without one, the loan can start at 100% of the price or more once taxes, fees and add-ons are financed.
- Financed add-ons. Products such as GAP or service contracts rolled into the loan raise the balance without raising the car's value.
- Rolling in the last car's negative equity. This is the big one. The new loan starts above the car's value, so the hole can follow you from car to car. The CFPB warns that it could leave a borrower in the same or a worse position the next time they finance a vehicle.
What the CFPB Found About Negative Equity Trade-Ins
In June 2024 the CFPB published a data spotlight on negative equity using loan-level data from nine large auto lenders (three banks, three finance companies and three manufacturer-owned captive lenders), covering loans made from 2018 to 2022. Its main findings:
| Measure | Negative equity rolled in | Positive-equity trade-in | No trade-in |
|---|---|---|---|
| Share of all loans | 11.6% | 32.1% | 56.3% |
| Average monthly payment | $626 | $496 | $493 |
| Average loan term | 73 months | 68 months | 67 months |
| Average loan-to-value ratio | 119.3% | 88.9% | 101.6% |
| Average payment-to-income ratio | 9.8% | 7.7% | 8.2% |
| Average credit score | 704 | 752 | 732 |
- The average amount rolled in was $5,073 on new-vehicle loans and $3,284 on used-vehicle loans.
- The share varied by year, from just under 8% of loans in 2022 to just over 17% in 2020.
- Repossession risk was higher. Borrowers who financed negative equity were more than twice as likely to have their account assigned to repossession within two years as borrowers with a positive-equity trade-in, and almost 1.5 times as likely as borrowers with no trade-in.
- Cheaper cars, bigger share. Negative equity equaled 23% to 25% of the purchase price for vehicles priced at $20,000 or less, compared with 10% to 14% for vehicles priced above $40,000.
An average loan-to-value ratio of 119.3% means that, on average, these borrowers owed about $1.19 for every dollar the car was worth when the loan began. The CFPB adds that, combined with depreciation and slow early principal payments, this leaves them owing more than the car is worth for much of the loan.
Trading In With Negative Equity: The Math
When you trade in an upside-down car, the dealer pays off your old loan and adds the shortfall to the new one. The CFPB's plain verdict: it "will make your new auto loan more expensive." Here is how much, in a hypothetical example.
Assumptions (hypothetical): a $35,000 new car, no other down payment, 6.35% APR (Experian's Q2 2026 average new-car rate), a 72-month loan, $5,000 of negative equity, and no taxes, fees or add-ons. Payments use the standard loan formula.
| Pay the $5,000 first | Roll $5,000 in, 72 months | Roll $5,000 in, 84 months | |
|---|---|---|---|
| Amount financed | $35,000 | $40,000 | $40,000 |
| Loan-to-value at purchase | 100% | 114% | 114% |
| Monthly payment | $585.85 | $669.54 | $591.08 |
| Total interest | $7,181 | $8,207 | $9,650 |
| Loan balance after 2 years | $24,776 | $28,316 | n/a |
What the table shows:
- Rolling the gap in costs about $84 more a month on the same 72-month term, and about $1,026 more in interest. You are paying interest on a car you no longer own.
- Stretching to 84 months hides the gap. The payment looks almost the same as the no-gap loan ($591 vs $586), but total interest rises by about $2,469 versus paying the gap first, and you stay in debt a year longer.
- The new loan starts underwater. Two years in, the rolled loan still has about $3,540 more owing than the clean one. If the new car loses value quickly, you could be upside down again when you want to trade it.
Paying the gap first does not mean you need $5,000 sitting in the bank. Keeping your current car a little longer and paying it down often gets you there. Run your own numbers in our auto loan calculator.
If you do roll it in, the CFPB suggests two checks. If a dealer promises to "pay off your trade no matter what you owe," make sure the negative equity is not quietly added to your new financing or contract. And about a week after the deal, call your old lender to confirm the old loan was actually paid off.
Six Ways Out of an Upside-Down Loan
| Option | Best when | Watch out for |
|---|---|---|
| Keep the car and pay extra | The car works and the payment is affordable | Make sure extra money goes to principal; check for a prepayment penalty |
| Refinance | Your credit improved or rates fell | Lenders may limit loans above the car's value; a longer term costs more interest |
| Sell privately and pay the gap | You need out and have some cash | You must pay the lender the full payoff before the sale can close |
| Trade in and roll the gap over | You must replace the car now | Higher payment and interest; you start the next loan underwater |
| Ask your lender for help | You can't make the payments right now | Get any new arrangement in writing |
| Voluntary repossession | Nothing else works | You can still owe a deficiency, and it can hurt your credit |
1. Keep the car and pay extra. This is the cheapest fix if the car is reliable. Every extra dollar toward principal closes the gap from your side while the car's value declines more slowly with age. Ask your lender how to mark extra payments as principal-only, and check your contract for a prepayment penalty, which the CFPB says some loans carry.
2. Refinance. A lower rate means more of each payment reduces principal. The CFPB lists refinancing as an option for borrowers who are struggling, but adds that a longer term may mean a smaller payment and more interest over the life of the loan. Lenders weigh loan-to-value when deciding whether to lend and at what rate, so a loan well above the car's value can be harder to refinance. Compare current rates on our auto loan rates page.
3. Sell privately and cover the gap. A private sale can bring more than a dealer's trade-in offer, which shrinks the gap. You will have to pay the lender the difference between the sale price and the payoff amount, in cash or with other borrowing. Ask your lender how it handles the sale of a car it has financed. The CFPB also notes that some lenders may be willing to buy the vehicle back.
4. Trade in and roll it over. Sometimes it is the only practical choice, for example when the car needs a repair worth more than it is. If so, keep the new loan as short as you can afford, put money down if possible, and choose a cheaper car so the new loan-to-value stays low. The worked example above shows why.
5. Talk to your lender before you fall behind. According to the CFPB, lenders and servicers may offer affordable payment plans, a new due date, or a pause in payments through forbearance. Get any agreement in writing and ask how it will be reported to the credit bureaus.
6. Voluntary repossession. A last resort, covered in detail below.
What about GAP insurance? GAP does not get you out of negative equity, but it protects you while you have it. The CFPB describes GAP as an optional product meant to cover the difference between your loan balance and what your insurer pays if the car is stolen or totaled, since standard insurance pays only up to the car's value. Without it, a totaled car can leave you paying off a loan on a car you no longer have. Prices vary, and you may be entitled to a refund if you sell, refinance or pay off the loan early. See is GAP insurance worth it.
Voluntary Repossession: What You Still Owe
Voluntary repossession (also called voluntary surrender) means you return the car to the lender yourself because you can no longer pay. It sounds like a clean exit. It is not.
- You still owe the shortfall. The FTC says that even if you return the car voluntarily, you remain responsible for the difference between what you owe on the contract and what the lender gets for selling the car. That difference is the deficiency.
- Fees may be lower. The FTC notes you might pay less in fees than with an involuntary repossession,.
- Your credit still takes the hit. The FTC says the creditor may still report the late payments or the repossession on your credit report. The CFPB says a repossession can stay on credit reports for up to seven years.
Upside-down borrowers are hit hardest here, because the deficiency starts from a loan that was already bigger than the car's value. Using the FTC's own example: owe $15,000, the lender sells the car for $8,000, and you owe a $7,000 deficiency plus fees allowed by your contract. In most states, the FTC says, the lender can sue for a deficiency judgment if it followed the repossession and sale rules.
Before choosing voluntary repossession, compare it with selling the car yourself. If you sell it yourself, you control the price, the gap you have to cover may be smaller, and there is no repossession to report. If you can't cover the gap, ask the lender whether it will accept a payment plan on the remaining balance.
If the Car Is Repossessed
Rules vary by state, but the CFPB and FTC describe the common protections:
- Notice may not come first. In many states, a lender can repossess once you default, without warning or a court order. It cannot "breach the peace," which in some states means using or threatening force or taking a car from a closed garage without permission.
- Servicemembers have extra protection. For loans taken out before active-duty service, the Servicemembers Civil Relief Act bars repossession without a court order.
- Your belongings. Contact the lender right away to get personal items back from the car, and write down what was in it.
- Notice of sale and buying it back. You have the right to be told before the car is sold, and you may be able to redeem it by paying the full loan amount plus repossession costs. Some states also let you reinstate the loan by paying what is past due plus the lender's expenses.
- Deficiency or surplus. If the sale brings less than you owe plus repossession fees, you owe the difference. The CFPB's example: owe $10,000, the car sells for $7,500, you owe $2,500 plus fees. If it sells for more than you owe, the surplus is yours. Lenders must sell in a commercially reasonable manner, and repossession fees must be reasonable.
- Collections. An unpaid deficiency can be sent to a debt collector. Know your rights in our guide to dealing with debt collectors.
If a repossession was a mistake, the CFPB says to contact your lender or servicer right away, dispute it with the credit bureaus, and submit a complaint if it is not fixed.
Sources & Methodology
- CFPB, Negative Equity Findings from the Auto Finance Data Pilot (June 2024; full report PDF): shares, averages, repossession risk, depreciation and amortization.
- CFPB, Should I trade in my car if it's not paid off?: payoff amount, rolling a balance over, post-deal checks.
- CFPB, What is a loan-to-value ratio in an auto loan?
- CFPB, What should I do if I can't make my car payments?
- CFPB, What happens if my car is repossessed?
- CFPB, What is Guaranteed Asset Protection (GAP) insurance?
- FTC, Vehicle Repossession: voluntary repossession, deficiency judgments.
- Experian, State of the Automotive Finance Market, Q2 2026: average new-car rate and loan terms, as reported on our auto loan rates page.
The CFPB report's dataset covers loans from nine lenders, not the whole market, and ends in 2022. The CFPB's report gives the positive-trade-in and no-trade-in loan-to-value ratios as 88.9% and 101.6% in its key findings and 89.1% and 101.7% in a detailed table; we show the key-findings figures. The worked example is our own amortization math, uses a constant rate, and leaves out taxes, fees and add-ons.
FAQ
What does it mean to be upside down on a car loan?
You owe more on the loan than the car is worth. The difference is called negative equity. Subtract the car's current value from your loan payoff amount to find it.
Can I trade in a car with negative equity?
Yes. The dealer pays off your loan and usually adds the shortfall to your new loan, which raises your payment and the interest you pay. You can also pay the shortfall in cash at the dealership so it is not financed.
How do I get out of an upside-down car loan?
The cheapest route is to keep the car and pay extra toward principal until you owe less than it is worth. Other options are refinancing at a lower rate, selling privately and paying the difference, or trading in and rolling the balance over, which costs the most over time.
How common is negative equity on a trade-in?
In the CFPB's study of loans made from 2018 to 2022, 11.6% of all vehicle loans included negative equity from a trade-in. The average amount rolled in was $5,073 for new-car loans and $3,284 for used-car loans.
Does voluntary repossession hurt your credit?
Yes. The FTC says the lender may still report the late payments or the repossession, and you may still owe the difference between your loan and the sale price. The CFPB says a repossession can stay on your credit reports for up to seven years.
Will GAP insurance pay off my negative equity?
Only if the car is stolen or totaled. GAP is meant to cover the difference between your loan balance and the insurance payout in those cases. It does not help if you simply want to sell or trade in the car.
Can I refinance an upside-down car loan?
Sometimes. Lenders look at loan-to-value when deciding whether to lend and at what rate, so the bigger your gap, the harder it can be. Paying the loan down first or applying with a stronger credit score improves your chances.
This article is for general information and is not financial or legal advice. Negative equity figures are from the CFPB's June 2024 data spotlight; guidance is from CFPB and FTC pages, all read on 2026-10-27. The average rate and loan terms are Experian Q2 2026 figures as reported on our auto loan pages. The worked example is hypothetical. Repossession rules vary by state; check with your state attorney general or a lawyer for your situation.
