Positive vs. Negative Equity in a Car: What’s the Difference?

What Is Positive Equity on a Car?

Positive equity means the current market value of your car is greater than the amount you still owe on your loan.

Example: If your car is worth $15,000 and you owe $10,000, you have $5,000 in positive equity.

When you borrow money with an auto loan, the vehicle acts as collateral. If you default, the lender can repossess and sell the car to recoup what you owe. Having positive equity is a good sign for both you and the lender because it means there's enough value in the car to cover the loan balance if needed.

What Is Negative Equity on a Car?

Negative equity means you owe more on your loan than the car is currently worth. If your car is worth $10,000 but your loan balance is $13,000, you have $3,000 in negative equity—sometimes called being upside down on your loan.

Nearly 25% of trade-ins toward new car purchases in the fourth quarter of 2024 had negative equity, with the average amount rolled into new loans reaching a record $6,838, according to Edmunds.

Negative equity can create problems in several situations:

• Your car is totaled. Your insurance payout may not be enough to cover the remaining loan balance.
• You sell the car or trade it in. The proceeds won't fully pay off the loan, so you'll typically need to cover the difference in cash or roll it into a new loan.
• You roll negative equity into a new loan. Your new loan amount increases, and you'll pay more in total interest over time. It can also make you upside down on your new loan from the start.

Learn more: How to Get Out of an Upside-Down Car Loan

How to Check the Equity on Your Car

To calculate your car's equity, subtract your remaining loan balance from the car's current market value. Here's how to find both numbers:

1. Find your loan payoff amount. Log in to your online account with your lender or call them directly to get the current payoff amount. Note that the payoff amount may be slightly higher than your account balance because it includes any interest that has accrued since your last payment.
2. Look up your car's market value. You can use websites like Kelley Blue Book, J.D. Power or Edmunds to get an estimate. Enter the car's year, make, model and mileage; enter your ZIP code; and select your trim level and condition.
3. Do the math. Subtract your payoff amount from the car's value. If the result is positive, you have positive equity. If it's negative, you're upside down.

Say you have a car with a trade-in value of $12,000 and a private party value of $14,500:

• If you owe $10,000 on the loan, you have $2,000 in positive equity with a trade-in and $4,500 in positive equity with a private sale.
• If you owe $13,000 on the loan, you have $1,000 in negative equity with a trade-in but $1,500 in positive equity with a private sale.

This is why the type of sale you're planning matters. The numbers can look very different depending on the route you take.

When Is the Best Time to Trade In a Car?

The best time to trade in your car is when you have positive equity. At that point, the dealer pays off your loan and applies any remaining value as a credit toward your next vehicle.

If you have negative equity, you'll still need to account for the difference. You can pay it off in a lump sum or roll it into your new loan. Rolling it in may feel convenient, but it starts your new loan in a hole.

Trade-ins also tend to offer less than private sales, since the dealer marks the car up before reselling it. If you have time and prefer to maximize what you get, selling to a private buyer is usually the better financial move. If convenience matters more, a trade-in is a simpler process.

Learn more: How to Get Out of an Auto Loan You Can't Afford

How to Trade In a Car

Before heading to the dealership to trade in your car, a little preparation goes a long way. Here are the general steps:

• Know your car's value. Look up your trade-in value on Kelley Blue Book or a similar tool before setting foot in a dealership. This gives you a baseline so you're not negotiating blind.
• Get your payoff amount. Contact your lender to find out exactly what you owe, including any accrued interest. This number determines whether you have positive or negative equity.
• Get multiple quotes. Visit more than one dealership and consider getting offers from online retailers like CarMax or Carvana. Competing offers give you negotiating leverage.
• Negotiate the trade-in separately. Don't let the dealer bundle your trade-in into the new car price negotiation. Keeping them separate helps you see clearly what you're getting for your current vehicle.
• Review the paperwork. Before signing, confirm that the trade-in value, loan payoff and new loan terms all match what you agreed to.

Learn more: How to Maximize Your Car's Trade-In Value

Frequently Asked Questions

The Bottom Line

If you're thinking about trading in your car and financing a new one, your credit score plays a big role in the interest rate you'll qualify for. A lower rate means more of your payment is going toward the principal balance, helping you build equity faster.

You can check your credit scores for free through Experian to see where you stand before you visit a dealership. Knowing your score in advance gives you a clearer picture of your financing options and more confidence at the negotiating table.