Upside-Down Loan (Negative Equity)
Quick Answer
A loan where you owe more than the asset is currently worth.
Definition
A loan where you owe more than the asset is currently worth.
Explanation
Being upside-down (underwater) means the car has depreciated faster than you've paid down the loan. Common in the first years — cars lose ~20% of value in year one. Problematic if you need to sell or if the car is totaled.
Long terms and small down payments increase the risk. Extra principal payments and shorter terms build equity faster.
Example
You owe $28,000 on your car but it's worth only $24,000. You're upside-down by $4,000. If you sell, you need $4,000 cash to close the loan.
Frequently Asked Questions
What is Upside-Down Loan (Negative Equity)?
A loan where you owe more than the asset is currently worth.
How does Upside-Down Loan (Negative Equity) work?
Being upside-down (underwater) means the car has depreciated faster than you've paid down the loan. Common in the first years — cars lose ~20% of value in year one. Problematic if you need to sell or if the car is totaled.Long terms and small down payments increase the risk. Extra principal payments and shorter terms build equity faster.
Can you give an example of Upside-Down Loan (Negative Equity)?
You owe $28,000 on your car but it's worth only $24,000. You're upside-down by $4,000. If you sell, you need $4,000 cash to close the loan.
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