Negative equity is one of the most common money problems in car ownership. Many buyers don’t fully understand it until they’re already dealing with it. At Approval Express, we believe in teaching our clients about every part of auto finance. Negative equity is a topic that deserves your attention.
Simply put, negative equity happens when you owe more on your car loan than your vehicle is actually worth. For example, your car loan balance might be $25,000. However, your car’s current value is only $20,000. In this case, you have $5,000 in negative equity.
This situation is more common than you might think. Nearly a quarter of Canadian car owners find themselves in this spot. Typical negative equity amounts reach about $7,700 in Canadian car loan deals. Fortunately, understanding negative equity is the first step toward avoiding it. Moreover, if you’re already facing it, there are ways to fix it.
How Does Negative Equity Happen?
Negative equity doesn’t appear overnight. Through our years of helping Canadians get car loans, we’ve seen how it builds up. Here are the most common reasons:
Small Down Payments
Minimal down payments can put you at quick risk. Starting your Canada car loan with little to no money upfront means you begin owing nearly the full purchase price. Meanwhile, your car starts losing value the moment you drive it home.
Fast Drop in Value
All Vehicles depreciate over time, but higher-than-average mileage and overall wear can speed up the process. Some models hold their value better than others. New cars can lose a big chunk of their value in the first year alone. Consequently, this quickly creates negative equity—a gap between what you owe and what the car is worth.
High Mileage
Higher mileage speeds up the loss in value. The more kilometers you put on your vehicle, the faster its resale value drops. In contrast, your car loan balance continues on its set schedule. It doesn’t matter how much you drive.
A Real-World Negative Equity Example
Let’s look at a scenario we see often at Approval Express. Farah bought a $30,000 vehicle. She financed the vehicle over eight years at 3.99% interest. After four years and 140,000 km of driving, her life changed. As a result, she needs to move up to a $35,000 car.
Here’s where negative equity becomes a real problem. Farah still owes $16,192 on her car loan. Unfortunately, due to high mileage and natural depreciation, her current vehicle is worth just $7,000 at trade-in.
This creates $9,192 in negative equity. Therefore, to buy her new car, Farah would need to borrow $44,192 – That’s the $35,000 purchase price plus the $9,192 she’s underwater. Her monthly payment would jump to $538. Essentially, she’d be paying interest on debt from a car she no longer owns. This is a common situation in Canada car loan scenarios. However, it’s one that can be handled with the right help.
Why Negative Equity Matters for Your Money
At Approval Express, we treat our clients like family. This means being honest about the real effects of negative equity:
Paying Interest on a Car You Don’t Own
When you roll negative equity into a new car loan, part of every monthly payment goes toward a vehicle you no longer own. That’s money that could be building equity in your current car. Alternatively, it could go toward other money goals.
Limited Freedom
Need to sell or trade your car? Perhaps you got a new job. Maybe your family is growing. Or something unexpected happened. Negative equity makes this hard. Specifically, you’ll need to cover the gap yourself before you can settle your car loan.
Growing Debt
Without help, negative equity in auto finance can become a cycle. Each new loan can create more debt. Borrowing costs get higher. Ultimately, it becomes harder to break free.
How to Avoid Negative Equity
Through our credit rebuilding program and years of know-how, we’ve learned what works. Here’s how to protect yourself from negative equity:
Put More Money Down
Try to put 20% or more down. This gives you equity from day one. Additionally, it greatly cuts your risk of going underwater on your car loan. We know saving for a larger down payment can be tough. Nevertheless, it’s one of the best ways to avoid negative equity.
Pick Shorter Loan Terms
A 48 or 60-month loan has higher monthly payments. However, compare it to a 72 or 84-month option. You’ll build equity faster. Furthermore, you’ll pay much less interest over the life of your Canada car loan. Our finance team can help you find a balance. We’ll look at both what you can afford and smart borrowing.
Choose Cars That Keep Their Value
Not all cars lose value at the same rate. Our team can guide you on which makes and models keep value better. This helps you avoid negative equity down the road. Generally, popular brands with strong track records hold their value best.
Know Your Real Budget
At Approval Express, we work with you to understand what you can truly afford. Not just what a lender will approve you for. This honest approach helps stop negative equity before it starts.
Shop for Better Rates
A lower interest rate is powerful. More of each payment goes toward your main balance. Less goes to interest. We work with top dealers across Canada, allowing us to secure good rates for our clients, no matter their credit standing.
Don’t Roll Old Debt Forward
This is perhaps the most important rule. Rolling negative equity forward means you’ll start your new car loan underwater. It gets worse with each vehicle purchase.
Already Dealing With Negative Equity? You Have Options
Are you currently facing negative equity on your car loan? Don’t worry. We’ve helped many clients get through this situation. There are several paths forward:
Keep Making Payments
Does your vehicle still meet your needs? Can you easily afford the payments? Staying the course allows you to eventually beat negative equity. You’ll build positive equity. Sometimes waiting is the best plan.
Pay Off the Loan
Do you have savings? Or access to a personal loan with a better rate? Paying off your car loan fully gives you a clean slate. You’ll own the car outright. Then, you can start fresh with your next auto finance choice.
Look Into Early Exit Options
Have you paid at least half your car loan balance? You may have options to exit your deal. Contact your lender to talk about what’s available. Different Canada car loan programs have different rules.
Work With Experts
At Approval Express, we’ve helped many clients who are underwater on their loans. Our team can look at creative fixes. We work with our dealer network to find options. As a result, we can limit the effect of negative equity on your next purchase.
How Approval Express Helps You Avoid Negative Equity
Our approach is different. We genuinely care about your long-term money health. Not just closing a deal:
We Teach First
Understanding ideas like negative equity helps you make smarter choices. It helps with your car loan and overall money health.
We Work With All Credit Types
You might have great credit. Or bad credit. Or no credit at all. We can help you get auto finance while limiting your risk of negative equity. Our credit rebuilding program is built to improve your money position over time.
We Give Honest Reviews
Do we see that a certain vehicle or loan setup puts you at high risk? We’ll tell you. Our name is built on doing right and being professional. Not short-term profits.
We Have a Network Across Canada
We work with top dealers in Vancouver, Calgary, and throughout Canada. This gives us power to get better terms. We find vehicles that hold their value.
Take Control of Your Auto Finance Future
Negative equity doesn’t have to be part of your car ownership story. You can understand how it happens. You can spot the warning signs. You can make smart choices about down payments, car loan terms, and vehicle pick. This protects you from this common money trap.
Remember: the goal isn’t just getting into a car you want today. It’s making a Canada car loan choice that supports your money health for years to come. At Approval Express, we’re committed to helping you reach both goals.
Are you shopping for your first vehicle? Looking to move up? Trying to handle a current negative equity situation? Our devoted team of finance specialists is here to support you. We understand the problems and stress that can come with vehicle financing. We’ve built our company around solving these issues for Canadian families.
Ready to explore your options? Our easy-to-use online system makes it simple. Get pre-approved and discover good rates for your next vehicle. Without the risk of negative equity trapping you in a cycle of debt.
Sources:
- Ontario Motor Vehicle Industry Council (OMVIC). “Understanding Negative Equity.” Available at: https://www.omvic.ca/buying/shopping-tips/car-loans/understanding-negative-equity/
- Carwow. “Negative Equity in Car Finance.” Available at: https://www.carwow.co.uk/guides/buying/negative-equity-in-car-finance
- Automobile Protection Association. “OMVIC’s Guide to Understanding and Avoiding Negative Equity.” Available at: https://www.apa.ca/en/omvics-guide-to-understanding-and-avoiding-negative-equity/
About Approval Express
Approval Express is your trusted partner for easy online car financing across Canada. We focus on helping customers get car loans no matter their credit standing. We focus on good rates, clear processes, and great customer service. Our mission is simple: to treat every client like family and help them reach their vehicle ownership goals while building a stronger money future.