Negative equity and amortization
A financed vehicle is worth less than it is owed on for a period. How long depends on four things you set at signing.
What you may owe. What the vehicle may be worth.
- Loan balance, calculated
- Illustrative vehicle-value range
- Middle scenario
- Value meets loan balance
Different vehicles retain value differently. This range illustrates possible outcomes; it is not a valuation of a specific vehicle.
| Month | Balance | Worth, slower to faster | Equity, central |
|---|---|---|---|
| 12 | $39,714 | $28,350 to $34,020 | $-7,584 |
| 24 | $32,825 | $21,263 to $30,618 | $-5,515 |
| 36 | $25,445 | $15,947 to $27,556 | $-2,231 |
| 48 | $17,540 | $11,960 to $24,801 | $2,192 |
| 60 | $9,072 | $8,970 to $22,321 | $7,700 |
| 72 | $0 | $6,728 to $20,088 | $14,256 |
Four things, and all four are settled at signing. A longer term pushes it later, because principal comes back more slowly. A smaller deposit pushes it later, because the loan starts closer to the price. Negative equity rolled in from a previous vehicle pushes it later, because it is borrowed against a car that is already gone. A higher rate pushes it later, because more of each payment is interest. Nothing you do after signing moves it except paying more than you owe.
The fifth thing is not yours to set at all, and it is why the chart shows a range rather than a line: how fast this particular vehicle loses value. That is what separates month 31 from month 61 above, and nobody can tell you in advance which edge you are on.
How this is calculated
The schedule amortizes the loan month by month. Interest is computed on the balance and rounded to the cent, principal is what is left of the payment, and the final instalment absorbs the residue so the balance ends at zero rather than at a few cents.
The value range starts below the vehicle price and declines annually. It starts below because taxes, fees and rolled-in debt are not value, and a car does not trade for what it retails. It is a range rather than a line because a single declining line is a prediction and nobody can make that one honestly.
The crossing is the first month a value scenario meets the balance. A scenario that was never underwater did not break even, and no marker is drawn for it. Three scenarios give up to three crossings, so the page reports the earliest and the latest rather than pretending to one.
The gap before the crossing is the argument. It is the window in which selling or trading means writing a cheque, and how wide it is depends on how fast the vehicle loses value.
A worked example
A $46,145 loan against a $37,800 vehicle
- Amount financed
- $46,145
- Rate and term
- 6.9% over 72 months
- Monthly payment
- $785
- Value at delivery
- $37,800
- Annual decline, slower to faster
- 10%, 15%, 25%
- Value meets balance
- Month 31 to 61
The middle scenario crosses at month 43. A vehicle that holds its value gets there at 31, one that loses it quickly at 61. Selling before the crossing means covering the difference in cash, and which of those three a given vehicle follows is the thing nobody can tell you in advance.
What this assumes
- The vehicle’s value at delivery and its three decline rates are yours to set. All four are illustrative until you do.
- The outlook runs ten years, which is four years past a 72-month loan. That stretch is the furthest from anything anyone can evidence, which is why it is drawn as a range rather than a line.
- The range is not an appraisal, and neither is any line inside it. Different vehicles retain value differently.
- The value curves compound annually and are sampled monthly, so the crossing resolves to the month rather than the day.
- Rate, term and cash down move the balance. They do not move the value range.
Where these figures come from
Nothing on this page is transcribed. The schedule is standard amortization of the figures you enter, and the value line is an assumption you set rather than a published estimate.
Reviewed by Andrea Nanigian, California licensed auto broker.
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