Millions of Americans owe more on their cars than they're worth. Here's how to get out of negative equity.
Most drivers don't know they're upside down or underwater on their car loan until they want to sell, trade in or refinance their vehicle. It can also leave them exposed if they total their vehicle and the insurance payout falls short of what they still owe.
Owing more on a car than it’s worth has become a more common scenario than most people realize. Over 3 in 10 drivers trading in a vehicle in the first quarter of 2026 owed more on it than its worth, the highest share since 2021, according to Edmunds. The average deficit was $7,183 per vehicle.
But negative equity does not always mean you’re in financial trouble. Many drivers become upside down because cars depreciate quickly, loan terms are longer, or they bought when vehicle prices were high. But it can limit your options and make your next financial move more expensive if you’re not careful.
Here, Caribou shares the common causes of underwater car loans, how to tell if you're in one, and what options are available to get out of negative equity.
What causes an upside-down car loan
Being upside down on an auto loan is usually caused by a combination of factors:
- Your car depreciated faster than your loan balance decreased. On average, new cars lose 30% value over the first two years, according to Kelley Blue Book.
- You made a small down payment or no down payment. Financing most or all of the purchase price gives you less equity from the start.
- You chose a long loan term. Longer terms can lower monthly payments, but they may slow down how quickly you build equity.
- Your APR is high. A higher APR means more of each payment may go toward interest instead of principal early in the loan.
- You rolled taxes, fees or add-ons into the loan. Financing extra costs can increase your loan balance beyond the vehicle’s value.
- You traded in a previous car with negative equity. Rolling old debt into a new loan can make it harder to get right-side up.
- You bought when vehicle prices were unusually high. If prices later fall or normalize, your car’s value may drop faster than expected.
- Your vehicle experienced accelerated wear and tear. While depreciation happens naturally, excessive deterioration can cause your car’s value to decline more rapidly than is typical.
How to calculate if you’re upside down
To find out whether you’re underwater on your car loan, subtract your car’s current value from the loan payoff amount.
Your payoff amount may be different from the balance shown on your monthly statement because it can include interest through a specific payoff date or other amounts owed. You can usually request a payoff quote from your lender.
For your car’s value, look at a few sources (such as Kelley Blue Book and Edmunds) and be realistic. Trade-in value, private-party value and dealer offers can all be different.
How to get out of negative equity
The right move depends on your car, your budget and how urgently you need to make a change.
1. Keep the car longer
The simplest way to get out of negative equity is to keep your car and keep paying down the loan. This works best if your vehicle is reliable, the payment fits your budget and you don’t need to sell or trade in right away.
2. Pay extra toward the loan principal
Paying extra toward principal can help you get out of negative equity faster because it lowers the loan balance, not just the next monthly bill. Before making extra payments, ask your lender how to apply them directly to the principal.
Even small moves such as rounding up your payment, making a one-time payment or paying a little extra each month can help. These car loan payoff strategies can help you decide what fits your budget.
3. See whether refinancing could help
Don’t assume you won’t qualify for auto refinancing with negative equity. Approval depends on your credit, income, vehicle, payoff amount and loan-to-value ratio. Refinancing won’t erase negative equity, but a lower APR could help more of your payment go toward the balance.
Be mindful of the term. A lower monthly payment can cost more over time if the loan is stretched too far. Before deciding, compare how loan terms affect the total cost of credit, use an auto refinance calculator to estimate savings, and review how pre-qualification and pre-approval work.
4. Make sure you have GAP coverage
If you’re keeping your car longer, it’s especially important to have GAP insurance or a GAP waiver, which is designed to help cover the gap if your car is totaled or stolen and your insurance payout is less than your remaining loan balance. Terms and coverage vary by product and provider, so be sure to ask questions so you get the right protection for your vehicle.
“I am a firm believer in GAP,” says Athena Miller, a Honda CR-V owner from Michigan. “I had a vehicle stolen many years ago and I had GAP insurance and it saved me.”
GAP doesn’t remove negative equity while you still own and drive the car. But, it’s designed to help cover the difference between your car’s value and the remaining loan balance in a total-loss situation, which could save you thousands of dollars for a car you are no longer able to drive.
5. Avoid surprise repairs with a vehicle service contract
In addition to GAP coverage, a vehicle service contract (VSC) can help protect against surprise car costs if you plan to keep your car longer. Sometimes referred to as an extended warranty, a VSC is a paid protection plan that covers certain repairs after your manufacturer's warranty expires.
Most plans exclude routine maintenance, normal wear and tear, and crash damage, but it can cover repairs to the engine, transmission, heating and cooling systems, brakes, and more. Some plans also include additional benefits like roadside assistance, towing, rental car reimbursement, or trip interruption coverage. Before you buy, read the covered parts list carefully to make sure the plan fits your vehicle and how you use it.
Bottom line
The best way to get out of a negative equity car loan is usually to keep the car longer and pay down the balance faster. Refinancing may help if you qualify for better terms, especially if your current APR is high. Trading in a car with negative equity can be costly if the old debt gets rolled into your next loan.
Before you make a move, compare your payoff amount, car value, monthly payment and total loan cost. The right option is the one that helps you avoid carrying the same negative equity into your next car.
This story was produced by Caribou and reviewed and distributed by Stacker.
