Car Loans and the Depreciation Curve

A car is the only major purchase most people finance where the asset is guaranteed to lose value faster than the loan shrinks. That gap has a name, and it's where people get hurt.

Last verified 2026-07-16

Two curves, racing in the same direction

A car loan is unusual: it's the one large purchase most people finance where the asset is guaranteed to lose value, and lose it fastest at the start. A new car commonly sheds around 20% of its value in the first year.

Meanwhile the loan balance falls on its own schedule, slowly at first because early payments are mostly interest. Two curves, both descending, at different speeds.

When the loan balance is above the car's value, you have negative equity — you're 'underwater'. Selling requires writing a cheque for the difference, and an insurance write-off after a crash pays the car's value, not your loan balance.

Why the long loan is the trap

A 72- or 84-month loan lowers the monthly payment, which is exactly what makes it attractive and exactly what makes it risky. The balance now falls more slowly than the car's value does, so the underwater period lasts years instead of months.

It also raises total interest paid, even at an identical rate, simply by keeping the balance outstanding longer.

That's what makes rolling over negative equity so costly. If you trade the car in while underwater, the shortfall doesn't disappear — the dealer adds it to the new loan. You now borrow more than the new car is worth on day one, start the next term further underwater than the last, and pay interest on the old car for years after it's gone.

This is the context for the dealer question 'what monthly payment are you looking for?'. Shifting the conversation from price to payment lets the term stretch, extras get added, and the total cost rise while the number you're focused on stays flat. The price, the rate, and the term are three separate negotiations.