Upside Down Car Loan: What It Means and How To Get Out of One

What Does It Mean To Be Upside Down on a Car Loan?

 📌 Being upside down on a car loan means your loan balance is higher than the car’s value. This is also known as having negative equity. 

For example, if you owe $18,000 on your loan but your car is only worth $15,000, you’re upside down by $3,000.

This can become a problem if you want to sell the car, trade it in, or if the car is damaged or stolen. In those cases, your lender still expects to be paid the full loan amount, even if the car is no longer drivable or worth much.

Why Do Auto Loans Go Upside Down?

Cars lose value quickly. This is called depreciation. Most new cars lose 20% or more of their value in the first year alone. If your loan doesn’t pay down fast enough, you can easily end up upside down.

Common reasons people end up upside down on a car loan include:

• You made a small or no down payment, so you financed almost the entire cost of the car.

• You chose a long loan term, which spreads payments out but slows down how quickly you build equity.

• You took out a loan with a high interest rate, making it harder to pay down the principal.

• You rolled negative equity from a previous loan into your new car loan, starting off already underwater.

• You added features or extras that increased the loan amount but didn’t raise the car’s resale value.

• You bought a car that was overpriced, so it lost value faster than your loan balance dropped.

Sometimes accidents or expensive repairs can lower the car’s value even more. If your warranty or insurance won’t cover the cost, the car may be worth much less than what you owe.

How To Tell if You’re Upside Down On Your Loan

To check if you're upside down, compare your car’s value to your loan payoff amount. Here’s how:

1. Contact your lender and ask for your loan payoff amount. This number may be a little higher than your regular balance because it includes interest and fees through the payoff date.

2. Find your car’s current value using tools like Kelley Blue Book or Edmunds.

3. Subtract the payoff amount from the car’s value. If the number is negative, you’re upside down.

What To Do When You’re Upside Down on a Car Loan

If you’re upside down on your car loan, you still have options. The right approach depends on whether you want to keep the car or get out of the loan.

Here are some options to consider:

• Keep the car and keep paying the loan

• Make extra car payments

• Refinance your car loan

• Sell the car

• Trade in the car

• Use gap insurance

• Consider bankruptcy

Below we look at each option in more detail.

Keep the Car and Keep Paying

If the car is still working well and fits your needs, you may choose to stick with it and continue making payments. Over time, your loan balance will drop, and the car’s value will eventually catch up. This works best if the gap between your loan and your car’s value is small.

Make Extra Payments

Making extra payments on your loan helps reduce your balance faster. You can do this regularly or whenever you get extra income, like a bonus or tax refund. Extra payments reduce interest and help you build equity more quickly.

Refinance Your Auto Loan

Refinancing means getting a new loan to replace your current one. This could help if:

• Interest rates have dropped

• Your credit score has improved

• You want to shorten your loan term

Upside down car loan refinance may be harder to qualify for, but some banks that refinance upside down car loans may work with you if the gap isn’t too large. 

You’ll want to shop around and ask about loan options that help reduce negative equity. A lower interest rate can also mean lower monthly payments and less interest over time.

Sell the Car

If you want to get out of the loan and are okay letting go of the car, selling it is one option. A private sale often brings in more money than trading it in. You’ll still need to pay the lender the full payoff amount, so if the sale price doesn’t cover it, you’ll need to cover the difference — possibly with savings or a small personal loan.

Talk to your lender before the sale so you understand how to handle the title and payment process. Selling an upside down car can work with some planning.

Trade In Your Car

A dealership may let you trade in your car, even if you’re upside down. But here’s the catch: They usually roll your negative equity into the new car loan. That means you’re starting your new vehicle loan already underwater.

This can become a cycle where you’re always upside down on your next car. If you’re going to trade in, try to make a larger down payment and look for trade-in incentives to reduce what you owe.

Use Gap Insurance

Gap insurance covers the difference between your car’s value and your loan balance if your car is stolen or totaled. This can protect you from owing money on a car you no longer have. 

Gap insurance usually only applies to newer vehicles and is sometimes included when financing through a dealership.

Consider Bankruptcy

If your upside down loan is just one of several financial problems, Chapter 7 bankruptcy may be an option to explore. This is especially true if you’re missing credit card or medical bill payments, have a wage garnishment order against you, or you’re facing a debt collection lawsuit. 

Depending on your situation, Chapter 7 bankruptcy could help discharge your responsibility for the auto loan or let you keep the car with more affordable payments.

Upsolve helps people file Chapter 7 for free. You can check your eligibility in just a few minutes.

Let’s Recap: How To Get Out of an Upside Down Car Loan

If you’re upside down in a car loan, here are your options:

• Keep the car and pay it down

• Make extra payments to reduce your balance faster

• Refinance for a lower interest rate or shorter loan term

• Sell the car and pay off the remaining loan balance

• Trade in your car (but be cautious about rolling over negative equity)

• Use gap insurance if your car is totaled or stolen

• Explore bankruptcy if you’re in serious financial trouble

Being upside down on a car loan can feel overwhelming, but many people deal with this and find ways to move forward. The key is knowing your situation and taking action that fits your goals and budget.