Negative Equity
When you owe more on a loan than the asset is worth—also called being 'underwater'.
What You Need to Know
Negative equity occurs when the amount you owe on a loan exceeds the current value of the asset. This is also called being "underwater" on your loan.
How It Happens:
- Rapid depreciation (especially with new cars)
- Long loan terms (72+ months)
- Small down payments
- High interest rates
- Market value drops faster than loan balance
Example: You buy a $30,000 car with a $5,000 down payment and a $25,000 loan. After 2 years, the car is worth $18,000 but you still owe $20,000. You have $2,000 in negative equity.
Why It's Problematic:
- Can't sell the car without paying the difference
- Limits your ability to trade in for a new car
- May need to roll negative equity into a new loan (not recommended)
- Reduces financial flexibility
How to Avoid:
- Follow the 20/4/10 rule
- Make larger down payments
- Choose shorter loan terms
- Buy used cars (let someone else take the depreciation hit)
- Build equity before trading in
Sources & References
This information is sourced from authoritative government and academic institutions:
- consumerfinance.gov
https://www.consumerfinance.gov/ask-cfpb/what-should-i-know-about-underwater-or-upside-down-mortgages-en-266/
Related Calculators & Tools
Put your knowledge into action with these interactive tools:
Auto Loan Payment Calculator
Estimate car payments, interest costs, and amortization for new or used vehicles while comparing loan terms, down payments, and credit score APRs.
Trade-In Value Calculator
Estimate dealer trade-in vs private sale value with adjustments for mileage, condition, options, accidents, and local demand.
Related Terms in Debt & Credit
APR (Annual Percentage Rate)
The total yearly cost of borrowing money, including interest and fees, expressed as a percentage.
Amortization
The process of paying off a loan through regular payments that cover both principal and interest.
Annual Fee
Yearly charge for having a credit card—$0 to $550+. Premium cards charge fees but offer rewards that can exceed cost for high spenders.
BNPL (Buy Now, Pay Later)
A short-term financing option that lets you split purchases into installment payments (usually 4 payments over 6 weeks) with little or no interest—if you pay on time.
Balance Transfer
Moving credit card debt from one card to another, typically to take advantage of a lower interest rate or 0% promotional APR.
Balance Transfer Fee
One-time charge (3-5%) to transfer debt to 0% APR card. $5K balance = $150-250 fee. Must save more than fee to make transfer worthwhile.