Dec 31, 2024
If a person owes more on a car than it’s worth, they have negative equity or are considered underwater on their auto loan. Equity for vehicles equals trade-in value minus the loan balance.
Let’s say your mother, 61, still owes $30,000 on a 2018 Chevrolet Bolt, but it's only worth $13,750. She's looking for a way out, and wouldn't be alone in this situation. Around 24.9% of trade-ins going toward new vehicles had negative equity in the fourth quarter of 2024, according to Edmunds. The average amount of negative equity was a record $6,838, while 24.6% of those with negative equity who traded for a new car owed more than $10,000 on the old loan.
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It's a tough spot to be in, but the good news is she has some options. The bad news is none of them are great.
So, can your mom get out of this mess? Here's what she needs to know.
How does negative equity happen?
There are a few reasons why people end up owing more than their car's value.
One big one is that vehicles depreciate or decline in value very quickly, especially if they're new. Most new autos lose about 20% of their value in the first year and are often worth only about 40% after five years, according to Kelley Blue Book. So, unless a driver makes at least a 20% down payment or pays off a good chunk of the loan quickly, they may end up with negative equity.
The cost of used cars can also affect equity. Used vehicles prices dropped 6.2% year over year in the third quarter of 2024, Edmunds reports, which indicates drivers are losing value in their autos at a faster pace.
Some people also stretch out their loan repayment schedule to make monthly payments cheaper. But the longer the payoff time, the greater the chance a loan balance won't decrease as fast as the car's value does.
All of these factors can add up to a situation where there's a very real possibility that if someone borrows money to buy a car, they're going to end up with a loan balance that's bigger than what they could sell the car for — and that can be a problem.
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What can be done about it?
In many cases, the best thing a person can do if they have negative equity is to keep paying down the car loan and keep driving the vehicle.
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If they planned to pay off the car during the payment period — and to keep driving it — negative equity doesn't matter much except for the effect it has on net worth. Your mom can pay off the $30,000, avoid damaging her credit and still have a functioning car at the end of the process.
Drivers going this route may want to purchase gap insurance, which can pay off the balance of a loan if a car is totaled and the owner owes more than its depreciated value.
If borrowing rates have gone down since your mom took out the loan, she may benefit from refinancing to cut costs in this situation. However, the average rate for new vehicles remains high at 6.8% as of the fourth quarter of 2024, per Edmunds.
The remaining options come with their own set of problems. One could sell the vehicle and pay the difference on the loan, however, they'll be without a car and with nothing to show for it. In some cases, a driver could buy a less expensive car and roll the negative equity into a new loan. But this can spike payments and increase the risk of being in negative equity again.
One can try to avoid this situation in the future by making a large down payment and taking the shortest car loan they can afford. Or, avoid borrowing altogether and pay cash for a cheap, used car that someone else already took the depreciation hit on.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
