Updated: Mar 14, 2024

Owe More on a Car Than It's Worth? What You Can Do

Learn what you can do when you owe more on a car than it's worth, including changes to your underwater auto loan and the risks involved.
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Like many people, you may not have had the means to buy a car upfront with cash.

So, you turned to the common auto loan.


You might come across a situation where you're actually underwater on your car loan (as in, you owe more than the car is worth).

We're not just talking about the moment you drive a brand new model off the lot.

Find out what you can do when you find that you owe more on a car loan than the value of the car.

What Does It Mean to Be Underwater on a Loan?

Being underwater on your loan means that the thing you purchased using the loan is worth less than the amount of money you still owe on the loan.

For example, if you took out an auto loan to buy a car and still owe $15,000, you’re underwater on the loan if your car is worth any amount less than $15,000.

Remember to compare your current debt balance and the current value of the car.

The amount you borrowed and the original cost of the car doesn’t matter.

With cars, it can sometimes be difficult to know whether you’re underwater on your loan or not.

Different people and companies value cars differently.

One source might say that your car is worth $10,000 while another might say $9,800.

To get a clearer picture, you might want to check multiple sources for the value of your car and calculate the average.

Risks Involved

Being underwater on your car loan exposes you to a few risks.

You could have trouble if you wind up in an accident.

If your vehicle is totaled, your insurance company will typically only pay you the value of your car, not the amount that you owe on the car loan.


If you’re in an accident, you could find yourself without a car and with a check too small to pay off your debt. You’ll be left making payments on a car that you don’t even have anymore.

You’ll be in a similar situation if you wind up having to sell your car for some reason. You might find that your needs change because your family is growing and you need more room in your vehicle.

A change in your financial situation could see you wanting to downsize from a two-car household to a one-car household.

No matter the case, you won’t be able to sell your car for enough to pay off the loan.

What Are Your Options?

If you find out that you are underwater on your car loan, you have a few options available.

1. Refinance

One thing that you can do when you’re underwater on a car loan is to refinance the loan to one with a shorter term.

This won’t immediately solve the problem of you being underwater.

In fact, you’re likely to wind up slightly further underwater as you deal with the costs involved in refinancing a loan.

What it will do is accelerate the speed at which you pay down your loan’s balance.

That means that you’ll get back above water more quickly, and you’ll pay off the loan faster overall.

That can help you avoid some of the pitfalls of being underwater on your car loan. You might even save money if you can refinance to a lower rate.

Personal loans

If for some reason, you find yourself unable to or unwilling to get an auto loan to refinance your car debt, you could consider getting a personal loan instead.

Personal loans are flexible loans that you can use for nearly any purpose.

They’re commonly used for things like refinancing or consolidating debt or paying for projects such as home improvement.

One benefit of personal loans is that most personal loans are unsecured. That means that your car will not be repossessed immediately should you stop paying the loan.

Personal loans also offer flexible repayment terms, often ranging from 2 to 5, or as many as 7 years.

The downside of personal loans is that they often carry higher interest rates than car loans do. This is to reflect the increased risk the lender takes on by making an unsecured loan.

2. Additional payments

Another thing you can do is make additional payments on your debt.

Like refinancing to a shorter-term car loan, this will help you get above water on the loan at a faster pace.

It also lets you avoid the hassle and cost of refinancing the debt.

3. Sell the car

The nuclear option to get out from underwater on your loan would be to sell the car and accept the loss.

In this scenario, you would have to sell the vehicle and kick in some extra money from your savings to cover the remainder of the loan.

Depending on the situation, this may be the best option to take, but that’s usually only the case if you were planning to sell your car anyway.

4. Stick it Out

The most common, and often the best solution to being underwater on a car loan is simply to stick it out.

Just keep making your monthly payments as usual and don’t think about the fact that you’re underwater on the loan.

Your car will keep running the same regardless of the amount you owe on it.

Remember that Being Underwater on Your Loan Isn’t the Worst Thing

One thing to keep in mind is that being underwater on a car loan isn’t the worst thing in the world.

Many people are underwater on their loans and don’t even know it.

The axiom that newly sold cars lose 20% of their value when they drive off the lot isn’t unfounded, so anyone making a downpayment of less than 20% on a vehicle is underwater almost immediately.

The only time that being underwater on a car loan becomes a problem is when you go to sell the car or have it rendered unusable by an accident.

Avoiding Related Issues

If you are underwater on a car loan, there are a few things you can do to manage the risks of the situation.

Carrying enough car insurance

Car insurance is a necessity for anyone who drives a car.

In fact:

Every state but New Hampshire and Virginia require by law that every driver carry a car insurance policy.

However, the mandatory insurance coverages aren’t the only ones available.

Typically, car insurance includes liability coverage to pay for accidents where you’re found to be at fault and coverage for the value of your car.

One thing that you can do when you get a car insurance policy is purchase gap insurance. This coverage comes at an extra cost, but it covers you for the difference in the value of the car and the amount you owe on your loan.

If your car is stolen or totaled, gap insurance will ensure that you have enough to pay off your debt.

This leaves you free to purchase a new vehicle without any debt from your previous car weighing you down.

Maintaining an emergency fund

In a way, you can provide your own form of gap insurance by maintaining a sufficient emergency fund.

If your car is totaled, stolen, or otherwise rendered unusable, you can pull money out of your emergency fund to cover the debt that remains after your insurance payment.

Everyone should have some type of emergency fund. They’re essential at allowing you to handle unexpected expenses without going into expensive credit card debt.

The size of your emergency fund can vary based on a number of factors.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

Typically, you should tailor it to the stability of your income, your monthly expenses, and how difficult it would be for you to find a new job.

If you have a car and you’re underwater on your loan, take that into account.

Make sure you have enough in your emergency fund to cover the difference between the value of your car and the balance of your loan.


Being underwater on your car loan isn’t the worst thing in the world. In fact, it’s not terribly uncommon given how quickly cars can depreciate in value.

Still, understanding what it means to be underwater, and what the risks of staying underwater on your loan are important.

If you are underwater on your car loan, take steps to correct the situation, or make sure that you can handle the risks.