What is negative equity in an auto loan?
If you owe more on your current auto loan than the vehicle is worth—referred to as being “upside down”—then you have negative equity. In other words, if you tried to sell your vehicle, you wouldn’t be able to get what you already owe on it. For example, say you owe $10,000 on your auto loan and your vehicle is now worth $8,000. That means you have negative equity of $2,000. That negative equity will need to be paid off if you want to trade-in your vehicle and take out an auto loan to purchase a new vehicle.
Understanding how negative equity works can help you make a better informed choice about a new auto loan. The longer your auto loan, the more likely you are to have negative equity for a longer period of time. On a longer term loan, you might later still owe money on a vehicle that has outlived its useful life or that you want to sell or trade-in. If you want to roll the balance of your existing auto loan into a new auto loan, this could make the new auto loan much more expensive. Additionally, you will be borrowing more than the price of your new vehicle which will make your total loan cost higher and increase your risk of negative equity in the new vehicle.