Katie and her husband earn $147,000 a year, almost double the median American household income of $74,000 (1). But they are “upside down” with car debt, so the 41-year-old called The Ramsey Show for advice.
The couple and their 15-year-old twins live in Alabama. Katie said they are on the second step of Dave Ramsey’s approach: paying off all debts, from the smallest to the largest. She told co-hosts George Kamal and Jade Warshaw that she has been working overtime every week to do it and that they have cut back on her lifestyle (2). With a $6,000 payment ready to be sent on her latest credit card debt, it seemed like Katie was in a great situation.
He then revealed the not-so-small matter of a $40,000 car loan. “I forgot about the car,” he told the co-hosts. “That’s the reason I’m calling.”
She and her husband bought the car new during the pandemic, but Katie estimates it’s only worth $27,000 today. That means you’re $13,000 short on that loan and would receive less than what you owe for trading in your car. And that’s not even taking into account the destroyed kitchen he’s been living without for a year and the $50,000 he’s already spent from the sale of a former residence to take care of emergency repairs to the house.
While Katie’s situation is extreme, she’s not the only one who finds herself underwater on her car loan and unsure whether to keep the vehicle or pay it off.
Katie’s $13,000 problem isn’t a fluke—it’s a symptom of a much broader problem in the auto loan industry.
Since 2020, new vehicle prices have increased 33% (3), and the median price surpassed $50,000 for the first time (4), according to Kelley Blue Book. To pay those sticker prices, buyers have extended the terms of their loans, and financing longer than six years is becoming increasingly common.
The result: monthly payments that now average about $760 and a growing number of drivers who owe far more than their car is worth.
And being “underwater” in a vehicle can happen quickly. A new car can lose 20% of its value (5) in the first year alone. If you financed most or all of the purchase price, then the depreciation of your new vehicle can quickly leave you in a hole that deepens with each successive month.
According to Edmunds third-quarter 2025 data (6), more than one in four new vehicles sold were underwater, a four-year high. The average amount owed on those reverse loans hit a record $6,905. Nearly one in four underwater borrowers owed more than $10,000, also a record.
What makes matters worse is what many buyers do next. Instead of keeping the car and paying more to reduce negative equity, they often roll it into their next auto loan, borrowing even more for a new vehicle to cover the shortfall on the old one. It feels like a solution, but in reality it just digs the hole even deeper.
Read more: 5 Essential Money Moves You Should Make Once You’ve Saved $50,000
To begin with, the best way to get out of a underwater car loan is to never get there, which is easier said than done. If you’re buying a car, make sure you have the funds to make a large enough down payment so you don’t end up underwater when you leave the dealership.
And instead of stretching out to a 72-month loan to make the payments seem manageable, buy a lower-cost car. Salespeople will often ask you about your monthly budget, but focus on the total cost of the car, not just what you’ll pay each month.
If you’re already underwater, you have a few options. The right choice depends on how deep in the hole you are and how much financial cushion you have.
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Stay and pay: If you can afford the payments and the gap isn’t huge, the easiest path is to keep the car and aggressively pay down the principal. This works best when you are slightly underwater and the car is reliable.
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Sell the car and cover the difference: This is what Kamal and Warshaw advised Katie to do. If you sell the car for what it’s worth and take out a small personal loan to cover the negative equity, you’ve traded a big problem for a smaller, more manageable one. From there, Kamal suggested that Katie spend around $5,000 on a reliable used car. Once you pay off the loan, you can consider upgrading your vehicle, in cash.
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Refinance Carefully: If interest rates have dropped, refinancing could lower your monthly payment and reduce what you pay overall. But refinancing does not erase negative equity. If you extend the term of your loan to reduce payments, you may end up deeper, not less. Make sure you run the numbers before committing to this path.
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Don’t turn it around: Whatever you do, don’t transfer negative equity to your new car loan. This may seem tempting, but it means your next auto loan will likely be underwater before you make your first payment.
As for how to decide which option is right for you? Kamal’s advice to Katie offers a helpful framework: Look at how much you spend on vehicles as a percentage of your household income. Ramsey says the value of everything you own with a motor should not exceed half your annual take-home pay, so if you earn $100,000, your car should be worth less than $50,000. If your vehicle exceeds that metric, especially while you’re trying to pay off other debt, it’s a sign it’s time to downsize.
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We rely only on verified sources and credible third-party reports. For more details, see our Ethics and editorial guidelines..
United States Census Bureau (1); YouTube (2); CBT News (3); Kelley Blue Book (4); Carfax (5); Edmunds (6); yahoo (7)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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