In recent years, owning a car has become more than just a convenience—it’s a financial commitment that’s growing increasingly risky for many Americans. One alarming trend in the U.S. auto loan market is the rise of negative equity loans—a situation where borrowers owe more on their auto loan than the vehicle is currently worth.
What Is Negative Equity in Auto Loans?
Negative equity—also known as being “underwater” or “upside-down” on your car loan—happens when the outstanding balance on your auto loan exceeds the resale or trade-in value of your vehicle.
For example, if you owe $25,000 on a car that’s only worth $18,000, you’re carrying $7,000 in negative equity.
Why Is This Happening More Often?
Several factors are contributing to the rise of negative equity auto loans in the U.S.:
Longer Loan Terms
More buyers are choosing extended loan terms—some as long as 72 to 84 months—to make monthly payments more affordable. However, cars depreciate quickly, especially in the first few years. Stretching out the loan means you’re paying mostly interest early on while your car’s value drops, creating a gap.
High Vehicle Prices
Car prices have surged over the past few years due to supply chain disruptions, chip shortages, and inflation. Many buyers financed more than they normally would—sometimes with little to no down payment—leading to larger loans that become harder to pay down.
Aggressive Financing Offers
Some dealerships roll negative equity from old loans into new ones, creating a snowball effect. You may be trading in a car you still owe money on, and instead of paying it off, the balance is added to your new loan.
Rapid Depreciation
Cars can lose 20% to 30% of their value in the first year alone. If you’ve financed most or all of the purchase without a sizable down payment, you could be underwater almost immediately.
Why It Matters
Negative equity isn’t just a number on paper—it has real-world consequences:
You’re stuck with the car longer, even if it no longer suits your needs or lifestyle.
Trading in the vehicle means you’ll still owe money, which often gets rolled into your next loan.
Refinancing options are limited because lenders typically won’t refinance loans with heavy negative equity.
In the event of an accident or theft, insurance may not cover your full loan balance, leaving you to pay the difference out of pocket—unless you have GAP insurance.
How to Avoid Negative Equity
If you’re planning to finance a car, here are smart ways to protect yourself:
Make a bigger down payment (at least 10–20%) to reduce your loan balance from the start.
Choose shorter loan terms (ideally 36–60 months) even if monthly payments are higher.
Buy used or certified pre-owned vehicles to avoid the steepest depreciation curve.
Avoid rolling over negative equity from your current car into your next purchase.
Consider GAP insurance if you’re financing a new vehicle with little down payment.
Final Thoughts
Auto loans can be a helpful tool, but they’re not without risk—especially in today’s volatile market. With car prices and interest rates rising, being financially savvy is more important than ever. Understanding the risks of negative equity can help you make informed decisions and avoid the trap of owing more than your car is worth.
Before signing any loan agreement, ask yourself this: If I had to sell this car next year, could I break even—or would I be paying the bank to let it go?