What negative equity on a car loan means
You have negative equity (you are "upside down") when the payoff on your current car loan is larger than what the car is worth as a trade-in. If you owe 15,000 and the dealer offers 10,000, the 5,000 gap does not disappear when you trade in. You either pay it, or the dealer adds it to the new loan. The US Consumer Financial Protection Bureau notes that rolling negative equity into a new loan can leave the borrower further underwater on the next car, which can raise the risk of owing money even after the car is sold or repossessed; see its 2024 data spotlight on negative equity.
How the calculator compares the two choices
- Equity = trade-in offer − loan payoff. Negative equity N is the shortfall; positive equity is a credit toward the new car.
- New loan if you pay it now B = price + fees − down payment − trade-in credit. You pay N in cash at signing.
- New loan if you roll it over = B + N, with the same rate and term.
- Monthly payment A = L × i ÷ (1 − (1 + i)−n), with i = annual rate ÷ 12 and n months (A = L ÷ n at 0%).
- Cost of rolling over: the extra payment is the payment on N alone, and the extra interest is n × extra payment − N.
Worked example
New car 30,000, no fees entered, 3,000 down, old loan payoff 15,000, trade-in offer 10,000, 60 months. Negative equity is 5,000. Paying it now means 8,000 at signing and a 27,000 loan; rolling it over means 3,000 at signing and a 32,000 loan.
| Rate | Payment, pay now | Payment, roll over | Total outlay, pay now | Total outlay, roll over |
|---|---|---|---|---|
| 0% | 450.00 | 533.33 | 35,000.00 | 35,000.00 |
| 6% | 521.99 | 618.65 | 39,319.14 | 40,118.98 |
At 0% the two choices cost the same in total; rolling over only spreads the 5,000 across the loan. At 6% the rolled-over 5,000 costs 96.66 a month more and 799.84 of extra interest over five years. That extra interest is the price of not paying the gap today.
What this calculator leaves out
Sales tax rules, insurance, maintenance, early-payoff penalties, the car's future depreciation and whether a lender will approve the larger loan are all outside the model. A rolled-over loan starts more upside down on the new car too, which matters if it is written off or sold early. Lenders and laws differ by country; do not assume rollover is offered where you live.
FAQ
Is it bad to roll negative equity into a new car loan?
It costs more whenever the loan charges interest, because you pay interest on the old debt for the whole new term. It can still be a reasonable choice if you need the car and cannot pay the gap, but compare the total outlay and the monthly payment first.
How can I avoid negative equity?
Keep the old car longer while you pay the loan down, make extra principal payments, put more money down on the next car or choose a shorter term so the loan falls faster than the car's value.
What if my trade-in is worth more than I owe?
Then you have positive equity, which works like a down payment. The calculator shows it as a credit and reduces the new loan.
Why does the calculator ask for an interest rate instead of APR?
The payment formula uses the loan's interest rate. An APR may include fees, so using it as the rate would overstate the payment slightly. Enter fees in the taxes and fees field instead.
To see a full amortization schedule for either loan, use the loan payment calculator.
Educational tool, not a credit offer or financial advice.