Why it happens
New cars lose value fastest in the first year or two. In the same period, most of your payment goes to interest, so the balance falls slowly. A small down payment, a long term or a balloon payment make the gap bigger.
The expensive way out: rolling it into the next loan
Dealers will often add what you still owe to your next loan. Here is what that costs on a $35,000 car at 7.5% over 72 months:
| No negative equity | $5,000 rolled in | |
|---|---|---|
| Amount financed | $35,000 | $40,000 |
| Monthly payment | $605.15 | $691.60 |
| Total interest | $8,571 | $9,796 |
The $5,000 gap ends up costing $6,224 in extra payments, and you start the new loan even further underwater.
Better ways out
- Keep the car and keep paying. The balance falls every month, and the car loses value more slowly as it ages. Most loans reach break-even on their own. The negative equity calculator estimates when.
- Pay extra toward the principal. Even small extra payments move break-even closer. See the pay off early calculator.
- Refinance to a lower rate if your credit has improved, though lenders may limit loans larger than the car’s value. Try the refinance calculator.
- Sell privately rather than trading in, since private sales usually get more, and pay the gap in cash.
- UK only: on hire purchase and PCP, you can hand the car back once you have paid half the total amount payable (voluntary termination), even if you are underwater.
Protect yourself while you are underwater
If the car is written off, insurance pays its value, not your balance. GAP coverage pays the difference. It is optional, so compare the price from your insurer with the dealer’s before buying it.
Try it yourself
Open the negative equity calculator and enter your own loan. It works in 13 currencies and follows each country’s loan rules.