Glossary term
Negative Equity
Negative equity means you owe more on a loan than the asset securing it is worth. It is common with car loans because vehicles lose value quickly while long loan terms pay principal down slowly. If you sell or trade in with negative equity, you have to cover the gap, often by rolling it into a new loan.
Updated October 17, 2026 · Editorial Team
How Negative Equity works in practice
Equity is market value minus the loan payoff. When the payoff is higher, equity is negative, sometimes called being upside down or underwater. Small down payments, long terms, high rates and fast depreciation all raise the odds. It is mostly a problem when you need to sell, trade in, or the car is totaled.
Say you owe $18,500 on a car worth $15,000. Your negative equity is $3,500. Rolling it into a new $28,000 car loan at 7.00% for 60 months makes the amount financed $31,500, raising the payment from $554.43 to $623.74 and total interest from $5,265.80 to $5,924.40.
To avoid deepening the hole, consider keeping the car until equity turns positive, making extra principal payments, or putting more down on the next purchase. Gap coverage can protect you if a car with negative equity is totaled.
Negative Equity: quick questions
How do I know if I have negative equity?
Get your loan payoff amount from the lender and compare it with a realistic market value for the car. If the payoff is higher, equity is negative.
Can I trade in a car with negative equity?
Yes, but the shortfall usually gets added to the new loan, so you pay interest on debt from the old car.
How do I get out of negative equity?
Paying extra principal, keeping the car longer, or paying the gap in cash at sale are common routes.
Sources
- Auto loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
- Regulation Z (Truth in Lending), 12 CFR Part 1026 — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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