Underwater loan

A loan where the outstanding balance exceeds the current market value of the asset securing it — most often an auto loan, since vehicles depreciate faster than a standard loan amortizes. Being underwater means a sale, trade-in, or total-loss insurance payout would not cover the remaining balance, leaving the borrower to pay the difference out of pocket. Extra payments or a larger down payment shorten the underwater period by reducing the balance faster than the asset loses value.