How Does Upside-Down Car Financing Happen?

In vehicular terms being upside down in your car is a financial problem. In car dealership slang, it simply means that at the end of your auto loan, you still owe more money to your car financing organization than the vehicle is now worth.

For example if you buy a $30,000 car with $2,500 down, finance it over a common 60-month term, but in three years you decide you want to sell it. Your payoff on the auto loan is $18,000, but your car is only worth $15,000 at this time. This means you are $3,000 upside-down, because in order to pay off your original auto loan, you would need to make up the difference between what your car is worth ($15,000) and what the car loan payoff is ($18,000).

Today it is not uncommon for consumers to be upside-down in an auto loan. According to Jim Moynes, who is the vice president, automotive marketing for Ford Motor Credit Company, one of the world’s largest auto finance companies, “negative equity,” or being upside-down, depends to a great extent on how you structured your purchase in the first place.

He says, “A large portion of the vehicle’s depreciation occurs in the first two to three years of ownership, regardless of make or model. Loans amortize over the term of the loan you took out, and typically there’s a period there where the depreciation outpaces the amortization. When you’re in that period, you’re in a position where you have negative equity. Once your amortization crosses over that line of the depreciation curve, which typically flattens out as the vehicle gets older, you get back to equity.”