An “upside down” car loan describes a situation where the outstanding balance on the loan exceeds the vehicle’s current market value. This occurs primarily due to depreciation, which is the decrease in a car’s value over time. For example, if an individual owes $15,000 on their car loan but the vehicle is only worth $10,000, they are $5,000 upside down on the loan.
The predicament of owing more than the asset is worth can present significant financial challenges. It limits the ability to sell or trade the vehicle without incurring a loss. This situation can become particularly problematic if the individual experiences financial hardship or wishes to upgrade their vehicle. Historically, this scenario has become more prevalent with longer loan terms and the rapid depreciation of certain vehicle models.
