The difference between what you still owe on your auto loan and what your vehicle is worth if you sold it is how equity, or a person’s stake in the vehicle, is calculated. As you pay down your car loan, you build equity in the vehicle.
If you have a positive equity in your car, the remaining value of your loan is higher than the value of your car. Negative equity, on the other hand, means that you owe more on your car loan than it is worth. The term “underwater” refers to having a negative equity in a vehicle. A vehicle’s value can be affected by factors such as inflation, which can raise vehicle prices while keeping the loan value constant. In this case, inflation can lead to an increase in value because the dollar is depreciating in strength.