How do people end up "upside down" in their car loans?

To understand this, let's look at two very real examples. One for buying a new car and the other for buying used. These illustrate how important it is for consumers to educate themselves in regards to auto finance and paying more than their minimum payments.

“Upside down” means owing more to your lender/bank than your car is actually worth. Your position will actually change during the life of the loan. Another term for this is having “negative equity” in your vehicle.

NEW CAR EXAMPLE (good credit)

It’s very common to become “upside down” when you purchase a new car, because of how it depreciates and all of the taxes, fees, warranties etc that people include in their loans. In addition, the first year you own your new car, it will depreciate by 20% and about 10% each year thereafter.

Let’s say you buy a 2018 F-150 for $25,000 (after taxes, fees, warranty etc) but the car itself is worth $24,000. You finance it for 0 down, 5% APR for 72 months. That’s a payment of $403/mo.

After one year of making minimum payments, the truck will be worth $19,200 but you will owe $21,335. At this point you are technically “upside-down” or have “negative equity”. This will happen at the end of year 2 as well. In the middle of the 3rd year, you will start to have positive equity. (This is why F&I departments can sell GAP insurance).

So the game is to pay the principal of the loan down faster than the car depreciates in value. This is HARDER to do when you have a long term (average today is 69 mos) or when you finance at a high APR.

When you pay ABOVE your monthly payment, all of that goes to principal! Let’s say in your first year you paid $100 more per month. At the end of that second year, your car would be worth $19,200 but you will only owe $19,545. You are basically even at that point and it will only get better from there.

USED CAR EXAMPLE (poor credit)

It’s also possible to become “upside down” even when purchasing a used car, especially if you have poor credit. The loan you’ll end up with has high interest which makes it difficult to pay the principal balance of the loan down at the same rate the car is depreciating.

Let’s say you have poor credit and buy a 2017 Toyota Camry Sedan LE with 20,000 miles, for $18,900 after taxes and fees. Let’s assume it’s actual value was $17,900. You pay $0 down and finance it for 84 months at 15% APR, so your monthly payment is $365.

Because of the way amortization works, you will be paying the MOST interest during the first part of your loan (first 36 mo or so). Some of your payment will go to principal (lowering your balance) and the rest to interest (paying the bank to borrow).

One year later -- making minimum payments:
Let’s take a look at your loan balance after 1 year: $17,247
Let’s take a look at your vehicle worth after 1 year: $16,110

At this point, you are “upside-down” because you owe the bank more than you could sell it for. Another term for understanding the value of your vehicle compared to the balance of the loan is “loan to value”.

It will take more than 3 years to turn the corner! You'll have a balance of $13,104 and your car would be worth $13,050. In this scenario to finance this way, you would need to plan on holding your car for a while and PRAY it does not get totaled (unless you purchased GAP insurance).


Unfortunately we see people all the time buying TOO MUCH CAR, then they should. This can also happen by “trading-up” too often. In addition we know that people are financing LONGER and MORE than ever before.

Your best remedy to avoid this is to:

  • Buy a car you can truly afford
  • Rresearch financing options before buying your car so you get the right loan for your current credit/income situation
  • Pay more than your minimum monthly payments to pay the principal balance down faster.
Something else to consider...

If you find yourself with negative equity, you may qualify to refinance your car! Lenders will allow you refinance even while upside down or with negative equity. Many will allow up to 150% loan-to-value. Your credit may have improved since your bought your car, allowing you to qualify for a better rate. Just make sure you don’t stretch your terms out… or you will simply fall into a similar problem. This can be a MUCH better option than trading it in to a dealer and having them pack your lost value into your car purchase (ouch!).

Refinancing could lower your current monthly payment. We can tell you for sure in 30 seconds.

Try it now

NOTE: The information contained herein is for educational purposes only and is not legal advice. You should seek advice from a legal professional regarding your particular situation.

Jul 02, 2018