Underwater On Car Loan and Can't Afford to Pay It Off

Owning a car is a must-have for lots of Americans. Many people need a car to get to work and transport kids to school. If you can afford your monthly auto loan payments and your car is safe and reliable, auto loans can be a smart use of debt.

But auto loans aren't without risk. Vehicles don't appreciate like property; some people end up owing more on their auto loan than the car is worth. This is called negative equity or being underwater. 

Research from Edmunds shows that as of the last three months of 2025, 29% of all trade-ins were underwater, with their owners owing an average of $7,214 per vehicle. 

Problems arise if you’re underwater on a car loan and can’t afford to pay it. Let’s look at what people should do when underwater on a bad car loan, and see how debt relief might help. 

How You Could Become Underwater on a Car Loan

First of all, it’s important to know that it’s not your fault if you’re underwater on a car loan. Many cars lose value, or depreciate, quickly after being driven off the lot. 

Let’s say you buy a used car with a $26,000 loan, and then two years later the car is worth $18,000—but your loan balance is $21,000. You have $3,000 of negative equity on this car. If you had to pay off the loan today, you wouldn’t have enough money, and you’d need to find an extra $3,000 to cover the balance. 

Your equity in a car, like home equity, is like an invisible savings account inside your property. As you pay down the principal on your loan, your equity gets bigger as long as the car's value stays steady. Making a larger down payment on a car could help increase the equity. Choosing a shorter loan term could also help you build equity faster, but the monthly payments will be bigger. 

However, car values tend to go down over time. If your car loses value faster than you can pay down your loan, you could easily end up underwater. Other factors can increase your odds of having an underwater car loan:

• Higher interest rates on a car loan could make it harder to pay down the principal balance quickly.

• Longer loan terms (like six or seven years instead of three years) could make you more likely to become underwater on the loan. The loan payments are smaller, but the car has more time to lose value. 

• Loans for an overpriced, older, less-reliable or less-popular car could go underwater because those cars tend to lose value more quickly. 

The Big Problem With Underwater Car Loans 

Here’s the thing about underwater car loans: most of the time, it’s not a problem. Cars tend to lose value. If you can afford to keep making your car payments, one day you’ll pay off your car loan and own your car free and clear. 

But being underwater on your car loan becomes a problem if you want to sell your car, trade in your car, or if your car gets totaled or breaks down. If you have a non-functioning, non-drivable car that’s stranded at the shop, or if your car gets totaled in a crash and you don’t have gap insurance to cover the difference, you could be stuck paying off the loan on a car you no longer have. 

Suppose you owe $15,000 on a used car that’s worth $10,000. You’re underwater by $5,000 on that loan. Then one day, the transmission fails. Your options become: spend another $10,000 fixing the transmission—or get rid of the car. 

If you have good enough credit to qualify for a new car loan, you could try trading in the car, even though you’re underwater. But this would add another $5,000 of debt to your new car’s loan balance. And not every dealership will give you a good trade-in on a car that needs a transmission.

What to Do With an Underwater Car Loan That You Can’t Afford

If you’re overwhelmed with debt, can’t keep up on your payments, and can’t sell the car for enough to pay off the underwater loan, you might end up having your car repossessed by the lender. This can be a stressful and embarrassing experience, especially if the repo team comes to your workplace with a tow truck. 

If you want to avoid car repossession, you could talk to your lender and ask for a voluntary surrender. This means you hand over your car to your auto loan lender. Voluntary surrender can be better for you in some ways than a typical repossession, but it may still have consequences for your credit.

In either case, the car will probably be sold at auction to pay off your loan balance. If the car sells for less than you owe, you'll still be responsible for the remainder (plus any fees). The amount that's left is called a deficiency balance, and the lender will expect you to repay it—even though you don’t have the car anymore. 

For example, if your repossessed car is worth $10,000 when the lender sells it at auction, but your loan balance is $20,000, you still owe $10,000 on the repossessed car. 

If you can't afford to pay the deficiency balance, consider if debt relief could help. Specifically, you might be able to settle the debt for less than you owe. 

Debt settlement is when you negotiate with a creditor to accept less than you owe and forgive the rest of your debt. It doesn't work on secured debt, like your auto loan, but unsecured debt is typically eligible for settlement. For a repossessed or wrecked car, the deficiency balance becomes unsecured debt and could be eligible for settlement.

Dealing with underwater car loans can be complex. Start by talking to your lender and ask for forbearance programs or other solutions. For some situations, you might want to talk to a bankruptcy attorney. But if you’re tired of worrying about an underwater car loan that you can’t afford, it helps to know that you have options for debt relief—and a path forward to get back on the road to your future.