Mar 26, 2026
Katie and her husband make $147,000 a year, almost double the average U.S. household income of $74,000. But they’re “upside down” in car debt, so the 41-year-old called into The Ramsey Show for advice.
The couple and their twin 15-year-olds live in Alabama. Katie said they’re on Baby Step 2 of Dave Ramsey’s approach — paying off all debt, from smallest to largest.
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She told (1) co-hosts George Kamel and Jade Warshaw that she’s been working 25 hours’ overtime every week to do it, and they’ve trimmed their lifestyle. With a $6,000 payment ready to be sent out on the last of some credit-card debt, it sounded like Katie was in a great spot.
Then she revealed the not-so-small matter of a $40,000 car loan.
“I forgot about the car,” she told the hosts. “That’s the whole reason I’m calling.”
She and her husband bought the car brand new in the pandemic, but Katie estimates it’s only worth just $27,000 today. That means she’s $13,000 underwater on that loan and would get less to trade in her car than what she owes on it.
And that’s before factoring in the gutted kitchen she’s been living without for a year and the $50,000 she’s already burned through from the sale of a former home to take care of on emergency home repairs.
While Katie’s situation is extreme, she’s not alone in being underwater on her car loan and unsure whether to keep or pay it off.
Car loans putting more stress on Americans’ budgets
Katie’s $13,000 problem isn’t a fluke: It’s a symptom of a much broader problem in the car loan industry.
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Since 2020, new vehicle prices have risen 33% (2), with the average price exceeding $50,000 (3) for the first time, according to Kelley Blue Book. To pay those sticker prices, buyers have stretched their loan terms, with six-year-plus financing becoming increasingly common.
The result: monthly payments that now average around $760, and a growing number of drivers who owe far more than their car is worth.
And being “underwater” on a vehicle can happen fast. A new car can lose 20% of its value (4) in the first year alone. If you financed most or all of the purchase price, then your new vehicle’s depreciation can quickly leave you in a hole that deepens every month.
According to Edmunds’ Q3 2025 data (5), more than one in four new-vehicle trade-ins were underwater, a four-year high. The average amount owed on those upside-down loans hit a record $6,905. Nearly one in four underwater borrowers owed more than $10,000, also a record.
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What makes it worse is what many buyers do next. Rather than keeping the car and paying more to pay down the negative equity, they often roll it into their next car loan, borrowing even more on a new vehicle to cover the gap on the old one. It feels like a solution, but it really just digs the hole even deeper.
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What to do if you’re underwater on a car loan
The best way to get out of an underwater car loan is to never get there to begin with—which is easier said than done. If you’re car shopping, make sure you have the funds to put down a large enough down payment so you don’t end up underwater when you drive off the lot.
And rather than stretching into a 72-month loan to make the payments feel manageable, shop for a lower-cost car. Salespeople will often ask about your monthly budget—but focus on the full cost of the car, not just what you’ll pay every month.
If you’re already underwater, you have a few options. The right choice depends on how deep you are in the hole and how much of a financial cushion you have.
- Stay the course and pay it down: If you can afford the payments and the gap isn’t massive, the simplest path is to keep the car and aggressively pay down the principal. This works best when you’re only slightly underwater, and the car is reliable.
- Sell the car and cover the difference: This is what Kamal and Warshaw advised Katie to do. If you sell the car for what it’s worth and take out a small personal loan to cover the negative equity, you’ve traded a big problem for a smaller, more manageable one. From there, Kamal suggested Katie spend around $5,000 on a reliable used car. Once the loan is paid off, you can consider upgrading your vehicle — in cash.
- Refinance carefully: If interest rates have dropped, refinancing could lower your monthly payment and reduce how much you pay overall. But refinancing doesn’t erase negative equity. If you extend your loan term to lower payments, you may actually end up more underwater, not less. Make sure to run the numbers before you commit to this path.
- Don’t roll it over: Whatever you do, do not roll negative equity over into your new car loan. This might feel tempting, but it means your next car loan is likely underwater before you make your first payment.
As for how to decide which option is right for you? Kamel’s advice to Katie offers a useful framework: look at how much you spend on vehicles as a percentage of your household income.
Ramsey says the value of everything you own with a motor shouldn’t exceed half your annual take-home pay (6) — so if you make $100,000, your car should be worth less than $50,000. If your vehicle exceeds that metric, especially while you’re trying to pay off other debt, that’s a sign it’s time to downsize.
Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
The Ramsey Show/YouTube (1); CBT News (2); Kelley Blue Book (3); Carfax (4); Edmunds (5); Yahoo Finance (6)
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Danielle is a personal finance writer based in Ohio. Her work has appeared in numerous publications including Motley Fool and Business Insider. She believes financial literacy key to helping people build a life they love.
