What does it mean to be underwater on a car loan?

It means the balance is larger than the vehicle is worth, so selling it would not clear the loan. It is the normal state of a new car bought with little money down, because the first-year drop is steeper than anything you can repay in twelve months. This page dates the month it ends rather than leaving it as a warning.

Where does the depreciation figure come from?

From the U.S. Bureau of Labor Statistics, which publishes annual depreciation rates by vehicle age — 23.9% in the first year, then about 11% for two years, then rising again to 14% between years three and five. The BLS measures these to strip depreciation out of the used-car price index, so they are a statistical method rather than a marketing estimate. They are averages across all makes; a truck holds value better, an electric car worse.

Should I roll the tax and fees into the loan?

It costs more, and it deepens the hole. Financing them means paying interest on them for the whole term, and it raises the balance without raising what the car is worth — so it pushes back the month you stop being underwater. Untick the box above to see both versions of the same deal.

What if I still owe money on my trade-in?

That balance does not disappear — the dealer adds it to the new loan. It is the single most common reason buyers end up deeply underwater, because you start the new loan already owing more than the new car is worth. Enter it in the "still owed on trade-in" field and watch where the crossing moves.

Is a rebate better than a low interest rate?

It depends on the size of the loan and the term, and the honest answer is that you have to run both. Take the rebate and enter your ordinary rate; then set the rebate to zero and enter the promotional rate. Compare the total cost line, not the monthly payment — the promotional rate usually wins on long terms and large amounts, the rebate on short ones.

Does this include sales tax correctly for my state?

It applies your rate to the price after rebate and trade-in, which is how most states do it — but not all, and a few tax the full price regardless of the trade-in. We do not encode a map of fifty states, because that is a rule that changes and we would rather show the assumption than hide it. Check your state and adjust the rate if it taxes a different base.

Money

Auto Loan Calculator

Payment with tax, fees and trade-in — and the month the car is finally worth more than you owe.

What you owe against what the car is worth

A new car loses 23.9% of its value in the first year — the steepest drop it will ever take — while the early payments are still mostly interest. The gap between the two lines is the money you would still owe if the car were written off tomorrow.

Scale tops out at $35,000

Month 1Month 72

Balance you oweWhat the car is worthWorth more than you owe

Year by year: what you still owe, what the vehicle is worth, and the difference
End of year	You owe	Car is worth	Difference
1	$30,070	$26,635	−$3,435
2	$24,809	$23,625	−$1,184
3	$19,196	$21,074	$1,877
4	$13,208	$18,123	$4,916
5	$6,818	$15,640	$8,823
6	$0	$13,592	$13,592

Depreciation follows the rates the U.S. Bureau of Labor Statistics publishes by vehicle age, measured from 1996 to 2022. They are averages across all makes: a truck holds its value better than the average, an electric car worse. Your own car will not follow this curve exactly — but a flat percentage would be wrong in a more misleading way, because the real decline is steep, then slow, then steep again between years three and five.

If the rate is not the one you entered

Nobody knows their rate before the dealer runs their credit. Half a point either way changes the loan by this much.

If the rate is lower
$580.05
at 6% · $6,764 interest
At the rate you entered
$588.35
at 6.5% · $7,361 interest
If the rate is higher
$596.72
at 7% · $7,963 interest

The same loan over other terms

A longer term lowers the payment and raises the price — and on a car it does something worse, because the vehicle keeps losing value while you are still paying it off.

Term	Monthly	Total interest	Total repaid
3 years	$1,072.72	$3,618	$38,618
4 years	$830.02	$4,841	$39,841
5 years	$684.82	$6,089	$41,089
6 years (your choice)	$588.35	$7,361	$42,361
7 years	$519.73	$8,657	$43,657

Amortisation schedule

72 payments of $588.35.

Each year of the loan, with interest, principal and remaining balance
Year	Interest	Principal	Balance	Paid off
1	$2,130	$4,930	$30,070	14% repaid
2	$1,800	$5,261	$24,809	29% repaid
3	$1,447	$5,613	$19,196	45% repaid
4Half the debt is gone at month 40 of 72.	$1,071	$5,989	$13,208	62% repaid
5	$670	$6,390	$6,818	81% repaid
6	$242	$6,818	$0	100% repaid

The formula

amount financed = price − rebate − down payment − (trade-in − still owed on it)

monthly rate r = annual rate ÷ 100 ÷ 12

payment = amount financed × r ÷ (1 − (1 + r)^−n)

vehicle value after y years = price × ∏ (1 − depreciation rate of each year)

you are underwater whenever balance > vehicle value

Worked example

$35,000 new car, nothing down, 72 months at 6.5%

payment = 35,000 × 0.00541667 ÷ (1 − 1.00541667⁻⁷²) = $588.35 a month
After 12 months you have paid down to $30,070 — but the car is worth $26,635
That is $3,435 underwater, the deepest point of the whole loan
The lines cross at month 29: for two and a half years, the car is worth less than the debt
Stretch the same loan to 84 months and the payment falls to $519.73 — and the crossing moves to month 42

How long the average underwater buyer stays underwater

Edmunds reports that 30.9% of trade-ins toward a new vehicle carried negative equity in the first quarter of 2026 — the highest share since 2021 — with $7,183 rolled into the next loan on average, over a term of 77.4 months at 7.9%. What no one reports is how long that leaves someone owing more than their car is worth.

Run those averages through the calculator above and the answer is month 47 — roughly 3 years and 11 months. The gap is deepest at month 12, where the debt exceeds the car’s value by $11,868.

Set that against another figure in the same report: the average age of a trade-in carrying negative equity is 4.3 years, the highest Edmunds has recorded. The two numbers land in the same place: the average underwater buyer trades in at almost exactly the moment they would have climbed out — and by rolling the balance forward, starts the next loan under water again.

A check on the arithmetic: for this scenario the calculator produces $15,560 of interest over the loan, against the $15,663 Edmunds reports for these borrowers — a difference of under 1%. The monthly payment lands at $928.96 against their reported $932.00. Same market, arrived at independently.

Where this goes wrong

Choosing the term by the monthly payment

A dealer who asks what monthly payment you are comfortable with is asking a question whose answer sets both the price and how long you spend owing more than the car is worth. Going from 72 to 84 months on a $35,000 car saves $68.62 a month — and adds thirteen months to the period where writing the car off would leave you paying for a vehicle you no longer have. That is the window an insurer sells GAP cover for, and its length is a choice you make at signing without being told you are making it.

Questions

What does it mean to be underwater on a car loan?: It means the balance is larger than the vehicle is worth, so selling it would not clear the loan. It is the normal state of a new car bought with little money down, because the first-year drop is steeper than anything you can repay in twelve months. This page dates the month it ends rather than leaving it as a warning.
Where does the depreciation figure come from?: From the U.S. Bureau of Labor Statistics, which publishes annual depreciation rates by vehicle age — 23.9% in the first year, then about 11% for two years, then rising again to 14% between years three and five. The BLS measures these to strip depreciation out of the used-car price index, so they are a statistical method rather than a marketing estimate. They are averages across all makes; a truck holds value better, an electric car worse.
Should I roll the tax and fees into the loan?: It costs more, and it deepens the hole. Financing them means paying interest on them for the whole term, and it raises the balance without raising what the car is worth — so it pushes back the month you stop being underwater. Untick the box above to see both versions of the same deal.
What if I still owe money on my trade-in?: That balance does not disappear — the dealer adds it to the new loan. It is the single most common reason buyers end up deeply underwater, because you start the new loan already owing more than the new car is worth. Enter it in the "still owed on trade-in" field and watch where the crossing moves.
Is a rebate better than a low interest rate?: It depends on the size of the loan and the term, and the honest answer is that you have to run both. Take the rebate and enter your ordinary rate; then set the rebate to zero and enter the promotional rate. Compare the total cost line, not the monthly payment — the promotional rate usually wins on long terms and large amounts, the rebate on short ones.
Does this include sales tax correctly for my state?: It applies your rate to the price after rebate and trade-in, which is how most states do it — but not all, and a few tax the full price regardless of the trade-in. We do not encode a map of fifty states, because that is a rule that changes and we would rather show the assumption than hide it. Check your state and adjust the rate if it taxes a different base.