Negative Equity.

In plain English

Negative equity means your loan balance is higher than the car's market value, a situation also called being underwater or upside down. It happens because cars lose value quickly, especially in the first few years, while your loan balance falls more slowly, particularly on long loans with small early payments. If you trade in or total a car with negative equity, the leftover balance does not disappear. It often gets rolled into your next loan or comes due, which can trap you in a cycle of borrowing more than your car is worth.

01Why it matters

If your car gets totaled or you need to sell while underwater, you can owe thousands on a vehicle you no longer have, and rolling that gap into a new loan only makes the next car cost more.

02The math, step by step

You owe $22,000 on a car now worth $18,000, so you have $4,000 of negative equity. If you trade it in, that $4,000 gets added to your new loan, meaning you finance the new car plus the old shortfall. The first constructive step is to keep the car and keep paying until the loan balance drops below the car's value, or to make extra principal payments to close the gap faster.

03What this is NOT

04Receipts

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