Owing more on your car loan than the vehicle is worth is called being “upside down” on your loan, and unfortunately, it’s fairly common. According to July 2026 data from Kelley Blue Book’s parent company, Cox Automotive, negative equity was 2.69 percentage points higher than a year ago and remained higher than any monthly reading recorded from 2015 through 2019. The average car shopper right now faces a tough economy and high prices, with the average transaction price for a new vehicle sitting at $49,855 in July and hovering close to this level throughout 2026.
In some cases, car shoppers simply overextend themselves to get the car they want without thinking about the financial implications. But in these current challenging economic conditions, more and more shoppers simply find themselves with no choice but to buy a vehicle at today’s prices when they need one. High prices, fast depreciation, and long loan terms with high interest rates can all quickly compound into negative equity. If you find yourself upside down on a car loan, here are some of the strategies you can consider.
Understand Your Options
If you find yourself in the position of being upside down on a car loan, you do have several options to consider, and each comes with its own pros and cons.
Option One: Keep the car you have until its value catches up
This is the option that won’t satisfy any desire to get into a new vehicle, but if you can keep up with the payments, it may be the wisest course.
| Pros | Cons |
| If you can be patient, when the value catches up, you’ll have equity to work with for a new car. | Mileage will be higher, and wear and tear are more likely the longer you drive a vehicle. |
| If you pay off the loan entirely, you will own the car outright and can do a private sale if you desire. | You will likely outlive the car’s warranty, meaning repairs will fall squarely on you and your wallet. |
| Generally, this is the wisest financial choice. | You will be driving an older model that may not have the latest and greatest features. |
Option Two: Roll over the existing debt into a new car loan
The disadvantages far outweigh any benefit of this option. When you roll over your debt to a new loan, you add your remaining balance on the current vehicle to the new car loan. While it will get you into a new vehicle, it increases your total debt and could raise your monthly payments, so give this option very careful consideration. Manufacturer incentives or discounts on the new vehicle can help offset some of the financial impact of negative equity, but they don’t erase what you still owe on your current loan.
| Pros | Cons |
| You can drive a new vehicle of your choosing. | This increases your total debt, deepening your debt cycle. |
| You may be able to get a comparable monthly payment, but it could require a longer loan term. | You will likely be asked to finance a long-term loan, and you could very likely owe more than the new car is worth. |
| The larger the amount of your total debt, the more you will pay in interest over the life of the loan. |
Option Three: Refinance your existing car
Many lenders won’t refinance a car loan with negative equity, but it will depend on factors like the type of vehicle, your income, your credit, and the loan-to-value ratio. You need to weigh this option carefully, as a lower APR can help more of the payment go to the balance, but longer loan terms add up in interest.
| Pros | Cons |
| You can get some immediate relief with lower payments. | Interest adds up with longer loan terms. Weigh this with the need for the immediate relief of lower payments. |
| A lower APR means more of the payment goes toward the balance. | Not everyone will qualify for refinancing; generally, you’ll need strong credit. |
| This will delay your ability to get into a new car. |
Keep Your Eye on Interest Rates and Loan Terms
Longer loan terms (and they are getting longer — Cox Automotive reports that in July 2026, the share of loans with terms greater than 72 months was 31.1%) can certainly mean lower monthly payments, but interest is always lurking. The longer your loan term, the more interest you’ll be paying over the life of the loan. Rate increases as low as 1% can add hundreds or even thousands to the bill over the life of the loan. Before signing on to a loan, use our Auto Loan Calculator to help you determine what you’ll be looking at in terms of total interest.
Avoid Being Upside Down Again
Whether you want the latest-and-greatest, or you simply just need a vehicle to get you through your life, there are a few things you can do before your purchase to help you stay afloat and prevent becoming upside down on a loan:
- Know your numbers: Educate yourself on your credit score and financing options so that you aren’t paying more than you need to. Knowing your credit and financing options makes it easier to evaluate the terms a dealer or lender offers.
- Understand the market: Knowing the interest rate landscape before applying for a loan can help you better recognize a good rate when you see one.
- Research, research, research: Having a good understanding of what makes and models you’re interested in, what the pricing looks like in your area, what your car’s trade-in value is, and how to negotiate when you’re at the dealer will set you up for success when the time comes to sign on the dotted line.
- Match your loan to your expected ownership length of time: A longer loan will help keep monthly payments low, but chances are it will lead to being upside down when the time comes to trade in for yet another new car.
- Be willing to consider different vehicles: You might have your heart set on a particular model, but keeping an open mind can lead you to a great deal on a car you might not otherwise have considered.
With car prices where they are, you’ll likely be financing a new car. This doesn’t have to end in disaster. Get educated on your numbers, be reasonable about what you truly can afford, and never let a seller pressure you into buying before you are ready. It is always okay to step away for a bit and think the purchase over before returning (or not).
Visit our Car Affordability Information Center for all of our in-depth advice on every aspect of the car shopping and buying process.
Editor’s Note: We have updated this article since its initial publication.
