Katie and her husband make $147,000 a 12 months, virtually double the typical U.S. family earnings of $74,000 (1). However they’re “the other way up” in automobile debt, so the 41-year-old known as into The Ramsey Present for recommendation.
The couple and their twin 15-year-olds stay in Alabama. Katie mentioned they’re on Child Step 2 of the Dave Ramsey strategy — paying off all debt, from smallest to largest. She informed co-hosts George Kamal and Jade Warshaw she’s been working extra time each week to do it, they usually’ve trimmed their way of life (2). With a $6,000 fee able to be despatched out on the final of some credit-card debt, it gave the impression of Katie was in an important spot.
Then she revealed the not-so-small matter of a $40,000 automobile mortgage. “I forgot concerning the automobile,” she informed the co-hosts. “That is the entire cause I am calling.”
She and her husband purchased the automobile model new within the pandemic, however Katie estimates it’s solely value simply $27,000 right now. Meaning she’s $13,000 underwater on that mortgage and would get much less to commerce in her automobile than what she owes on it. And that is earlier than factoring within the gutted kitchen she’s been dwelling with out for a 12 months and the $50,000 she’s already burned by from the sale of a former residence to deal with emergency house repairs.
Whereas Katie’s scenario is excessive, she’s not alone in being underwater on her automobile mortgage and uncertain whether or not to maintain the car or pay it off.
Katie’s $13,000 downside is not a fluke: It’s a symptom of a wider difficulty within the automobile mortgage business.
Since 2020, new car costs have risen 33% (3), with the typical value exceeding $50,000 for the primary time (4), in keeping with Kelley Blue E book. To pay these sticker costs, consumers have stretched their mortgage phrases, with six-year-plus financing changing into more and more frequent.
The consequence: month-to-month funds that now common round $760, and a rising variety of drivers who owe excess of what their automobile is value.
And being “underwater” on a car can occur quick. A brand new automobile can lose 20% of its worth (5) within the first 12 months alone. In case you financed most or all the buy value, then your new car’s depreciation can rapidly go away you in a gap that deepens with every successive month.
In response to Edmunds’ Q3 2025 information (6), multiple in 4 new-vehicle trade-ins have been underwater, a four-year excessive. The common quantity owed on these upside-down loans hit a report $6,905. Practically one in 4 underwater debtors owed greater than $10,000, additionally a report.
What makes it worse is what many consumers do subsequent. Quite than retaining the automobile and paying extra to chip away on the adverse fairness, they typically roll it into their subsequent automobile mortgage, borrowing much more on a brand new car to cowl the hole on the outdated one. It seems like an answer, however it actually simply digs the outlet even deeper.
Learn Extra: 5 important cash strikes to make when you’ve saved $50,000
One of the best ways to get out of an underwater automobile mortgage is to by no means get there to start with — which is simpler mentioned than executed. In case you’re automobile purchasing, be sure you have the funds to place down a big sufficient down fee so you do not find yourself underwater if you drive off the lot.
And reasonably than stretching right into a 72-month mortgage to make the funds really feel manageable, store for a lower-cost automobile. Salespeople will typically ask about your month-to-month price range — however deal with the total price of the automobile, not simply what you will pay each month.
In case you’re already underwater, you could have a couple of choices. The fitting alternative depends upon how deep you might be within the gap and the way a lot of a monetary cushion you could have.
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Keep and pay it down: In case you can afford the funds and the hole is not large, the best path is to maintain the automobile and aggressively pay down the principal. This works finest if you’re solely barely underwater, and the automobile is dependable.
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Promote the automobile and canopy the distinction: That is what Kamal and Warshaw suggested Katie to do. In case you promote the automobile for what it is value and take out a small private mortgage to cowl the adverse fairness, you’ve got traded a giant downside for a smaller, extra manageable one. From there, Kamal steered Katie spend round $5,000 on a dependable used automobile. As soon as the mortgage is paid off, you possibly can contemplate upgrading your car — in money.
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Refinance fastidiously: If rates of interest have dropped, refinancing might decrease your month-to-month fee and cut back how a lot you pay general. However refinancing would not erase adverse fairness. In case you prolong your mortgage time period to decrease funds, you may very well find yourself extra underwater, not much less. Make sure that to run the numbers earlier than you decide to this path.
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Do not roll it over: No matter you do, don’t roll adverse fairness over into your new automobile mortgage. This may really feel tempting, however it means your subsequent automobile mortgage is probably going underwater earlier than you make your first fee.
As for how you can determine which choice is best for you? Kamal’s recommendation to Katie presents a helpful framework: Take a look at how a lot you spend on automobiles as a share of your family earnings. Ramsey says the worth of every thing you personal with a motor should not exceed half your annual take-home pay — so when you make $100,000, your automobile must be value lower than $50,000. In case your car exceeds that metric, particularly whilst you’re attempting to repay different debt, that is an indication it is time to downsize.
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United States Census Bureau (1); Youtube (2); CBT Information (3); Kelley Blue E book (4); Carfax (5); Edmunds (6); Yahoo (7)
This text gives data solely and shouldn’t be construed as recommendation. It’s offered with out guarantee of any form.
