Underwater on Your Car Loan?

April 11th, 2019 by

It is not uncommon for car buyers to get underwater on their car loan. The average cost of a new car is just over $36,000 which means a car loan is inevitable for the majority of buyers. Buyers often take longer terms to get lower payments. Because a vehicle starts depreciating the minute you drive it off the lot, you can find yourself “underwater” or “out of equity”.  There are a number of factors that influence the difference between your vehicle’s value and your loan balance.


  1. In addition to the financed value of your new vehicle, there may be taxes and fees that you financed in your loan.
  2. The larger down the payment you have, the lower your financed balance will be initially and always. While you may not recover that down payment earlier in the life of your vehicle; down the road, if you maintain your vehicle it will come back to you.
  3. Some banks report gross loan balances. While this is rare, it could also represent a difference between your value and payoff amount.  Most banks will quote you a net payoff amount; subtracting the unused interest.  Most auto loans are simple interest and will only charge interest on the principle.
  4. If you drive more than average mileage per year, you are in effect “depreciating” your vehicle faster than you are paying down your loan. That also contributes to an inequitable situation if your outstanding loan balance is greater than the value of your car.

To calculate negative equity, use tools like NADA or KBB to estimate the value of your car. Subtract the value from the loan amount. You may not realize it but you have several options for dealing with a difficult financial situation.

  • Sell the car and accept the loss
  • Contact your lender and see if you can refinance or make advance payments
  • Trade the car in on a lease

Our finance team can help you drive away in a new car and absorb your existing loan balance into the lease agreement. This doesn’t work for everyone and every situation.  The over-simplified premise is that a lease is just another financial instrument, that has differences from standard financing.  Because you in essence only are paying for approximately 50% of the car; at the end of the lease, you do not have negative equity on the new vehicle because the lease-end value is pre-determined.

If you find yourself upside down on your current vehicle loan, call us or come in. We would love an opportunity to lay out your options for you.

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