Have you ever tried to sell something, only to find out that you owe more money on this thing than it is actually worth?
This is called negative equity, and it is more common than you think, especially when it comes to the combination of:
- Expensive prices
- High interest rates
- Rapid depreciation
Also called being ‘underwater’, the things people have negative equity in most often are their cars, which meet all three of these criteria.
The average price for a new car in 2026 is around $50,000, and auto-shoppers are putting less and less money down for a down-payment, resulting in higher interest rates and longer loan terms.
Additionally, many cars are simply overpriced, and sell for a fraction of the sticker price after just 10,000 to 20,000 miles of use.
Consider this example:
Jim goes to his local auto dealership and purchases a brand-new vehicle for $40,000. He splurges for the nicer trim since he has been working so hard recently. He has been saving up for this, but not the traditional 20%, only around 10%.
Jim has a decent credit history, and combined with the below-average down-payment, he secures an interest rate of 12% for a 72-month loan. Jim drives off the lot, happy with his purchase. Fast-forward two years, the dopamine of buying a new car has long worn off, and Jim wants an upgrade. The manufacturer released a new version of his favorite model of car.
He calls his local auto dealership to see if he can trade in his car, and the salesman gives him an estimate of $18,000. Jim logs onto his bank and checks his loan balance: $32,000. Jim owes $32,000 on a car that is only worth $18,000! Jim now has $14,000 in negative equity!
What should Jim do?
The best way to get out of a negative equity situation is to never get in it in the first place, but if you are in one already, there are some ways of minimizing the damage. The best approach will differ based on the asset and your personal situation, but here are some general guidelines:
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Pay off the principal as soon as possible. Save up extra money to reduce the principal so your money is not just going to the interest payment. Make more payments than required, if possible (such as bi-weekly rather than monthly).
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Refinance. Refinancing is essentially going to the bank or lender and asking for them to give you a better interest rate. This is not always an option, but if your credit score has improved or market rates have dropped, ask a bank or credit union to refinance your loan. A lower interest rate means more of your monthly payment goes toward owning the actual asset.
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Keep the asset! Often, one of the worst things you can do is roll-over your negative equity in one asset into another, such as a new car loan. This just gives auto dealerships and banks an excuse to charge you an even higher interest rate!
How can I avoid negative equity?
Avoid the three traits mentioned above: expensive price, high interest rate, rapid depreciation. In practice this may mean buying a used car, spending more money up-front in the down-payment, or buying a car known for its reliability.
Why doesn’t this happen with houses? It’s a good question, after-all, houses are expensive and mortgage interest rates have been sky-high recently. The simple answer is that real estate generally tends to appreciate (increase in value) over time, while cars always depreciate (lose value). When you make your monthly mortgage payments, your loan balance goes down while your home's value typically goes up.
However, negative equity can happen in real estate. It usually occurs when a buyer purchases a home at the absolute peak of a housing boom right before the market takes a downturn. It also happens to people who try to sell a home only a year or two after buying it, before their monthly payments have had time to chip away at the principal balance.