If you hold a car loan, here’s a math task for you.

Start by finding an online tool to check your car’s value. Next, check your loan amount and see how it compares to your vehicle’s worth. The results might surprise you.

A recent survey indicated that nearly one in three auto loans are in a state of negative equity, meaning the amount owed exceeds the car’s current value. This situation is commonly referred to as being underwater.

Experiencing negative equity on a car loan is increasingly common. Cars typically lose value over time, and those with loans are often trying to reduce their debt faster than their car’s worth drops.

Currently, it’s a particularly unideal situation to hold a car loan.

Car prices are declining. Interest rates are increasing.

Loan costs are on the rise, with the average interest rate for a 60-month new car loan at 8.4% in August—up from 4.6% three years ago, based on government statistics.

At the same time, vehicle prices are taking a downturn. Data shows that used car prices have fallen approximately 20% from February 2022 to August 2024 for urban consumers.

This combination of factors could be problematic for those who secured auto loans in recent years.

A September survey from CarEdge, an auto marketplace, revealed that 31% of car loans are currently underwater. This figure jumps to 39% for vehicles bought since 2022.

Additionally, a study by the car comparison site Edmunds discovered that the average trade-in customer with negative equity owes $6,458—an all-time high—while 20% owe $10,000 or more.

“The concerning part is the amount people are underwater,” remarked Ivan Drury, director of insights at Edmunds. “The situation is quickly worsening.”

Many drivers misjudge their car’s value

The CarEdge survey also highlighted a troubling pattern: a majority of drivers tend to overvalue their cars. This disconnect can result in unpleasant surprises when they attempt to sell or trade their vehicle.

“Many individuals may not recognize or care that their car is underwater,” noted Kimberly Palmer, a personal finance expert at NerdWallet. “Yet, there are circumstances when this knowledge can be crucial.”

Negative equity only becomes painfully real when you need a new car. This could happen if your vehicle is damaged beyond repair or simply stops functioning effectively.

“You still owe the bank that money,” Palmer added. “Those payments are still on your plate.”

This situation presents an unwelcome decision: You can keep paying off your loan until you’re free of it, make a large payment to settle the debt, or attempt to move the remaining balance into a new loan.

Before the pandemic, Drury observed that about a third of customers who traded in cars had negative equity.

“They would take that remaining debt and just transfer it into a new vehicle,” he explained.

These consumers would borrow sufficient funds to eliminate their old loan and finance a new one. This process was somewhat manageable in the pre-pandemic landscape when car prices and interest rates were lower.

The average cost of a new car is $48,623

As of 2024, the typical new car price is $48,623, according to Kelley Blue Book. Reports from NerdWallet indicate the average monthly payment for a new car stands at $734.

Borrowers are increasingly seeking larger loans and opting for longer repayment terms. The longer the loan period, the harder it becomes to keep up with the depreciation of the vehicle’s value.

The value of your car declines since you are paying off the loan more slowly.

If you incorporate negative equity into a new car loan, “this will keep you in a difficult position longer with your new loan,” explained David Bennett, a senior automotive manager at AAA.

When you trade in a car that has negative equity, you might feel pressured to purchase a pricier vehicle, resulting in loan payments that could be higher than before.

For example:

If you have $10,000 in negative equity and decide to buy a new car costing $25,000 by financing the whole amount, you will end up borrowing $35,000 in total—this is 40% more than the worth of the new car.

According to Drury, most lenders are typically hesitant to grant loans that exceed the value of the new car by that much.

If you opt for a $50,000 vehicle, you would be borrowing $60,000, which is 120% of the new car’s value. This is a ratio a lender is generally more likely to approve.

What Can You Do if You’re Underwater?

Suppose you used a car value calculator and found out you are in an underwater loan situation. What steps should you take?

Here are some expert recommendations.

Increase Your Payments

If you’re able to pay down your loan balance more quickly, you’ll reach positive equity sooner. If your budget allows, think about rounding up your monthly payment—like increasing it from $734 to $800.

Consider Refinancing

Due to high-interest rates, finding a much lower refinance rate “is likely not going to be feasible,” Drury noted.

However, if your finances permit, you might want to refinance for a shorter loan term. This would increase your monthly payments but help you pay down the balance sooner.

Another possibility is to locate a dealer offering a low promotional interest rate for a new car, especially a more affordable model. If you trade in a vehicle with negative equity, you may end up with a much lower interest rate—albeit on a more substantial loan.

This option involves some risk: you still need to cover those monthly payments.

“It’s crucial to consider what you can afford,” added Bennett.

Stick It Out

The most advisable solution for dealing with an underwater car loan, according to all the experts consulted by YSL News, is to maintain your car and continue making loan payments.

Lenders tend to charge higher interest upfront. Over time, as you make payments, a larger portion will go towards reducing the principal amount. Eventually, your negative equity will decrease.

“The longer you hold onto the vehicle, the better your situation will become,” stated Drury.