If you’ve been looking into trading in your vehicle or refinancing your car loan, you’ve probably heard the term “negative equity” thrown around. Maybe someone at a dealership mentioned it. Maybe you saw it online. Maybe you’re starting to suspect you might have it.
Let’s break down exactly what it means, why it happens, and what you can actually do about it.
The Simple Definition
Negative equity means you owe more on your car loan than your vehicle is currently worth.
That’s it. If you owe ten thousand dollars on your loan but your car is only worth seven thousand in today’s market, you have three thousand dollars in negative equity.
You might also hear this called being “upside down” or “underwater” on your loan. All three terms mean the same thing.
A Real Example
Let’s say you financed a truck a couple years ago. Your current loan balance is twelve thousand. You check what similar trucks with the same mileage are selling for, and the number keeps coming back around nine thousand.
The gap between what you owe and what it’s worth is three thousand dollars. That’s your negative equity.
Why This Happens
Negative equity isn’t rare. It happens to a lot of people, especially in the first few years of owning a vehicle. Here’s why.
Depreciation hits fast. Vehicles lose value the moment you drive them off the lot. That first year, your car might lose fifteen to twenty percent of its value. Meanwhile, your loan balance is only dropping slowly because most of your early payments go toward interest, not principal.
Long loan terms make it worse. When you spread payments over six, seven, or eight years, you’re paying down the balance really slowly. The vehicle depreciates faster than you’re reducing what you owe.
Small or no down payment. If you put little or nothing down, you’re financing the full value of the vehicle. As soon as it depreciates, you’re underwater.
Rolling previous debt into the loan. If you traded in a vehicle that already had negative equity and rolled that gap into your new loan, you started the new loan already upside down.
When Negative Equity Becomes a Problem
Having negative equity isn’t automatically a crisis. If you’re keeping the vehicle and making your payments, it’s just a number on paper. Over time, as you pay down the loan and depreciation slows, the gap usually closes.
It becomes a real problem in a few situations.
You need to trade it in. If your life changes and you need a different vehicle, negative equity makes that complicated. You can’t just trade it in and walk away. That gap has to get dealt with somehow.
The vehicle gets totaled. If your car gets written off in an accident, insurance pays out what the vehicle was worth, not what you owe. You’re stuck covering the negative equity out of pocket unless you have gap insurance.
You’re struggling with payments. If you’re having trouble making the payment and want to sell the vehicle to reduce your costs, negative equity means you’d need cash just to get out of the loan.
You want to refinance. Most lenders won’t refinance a loan where you owe significantly more than the vehicle is worth.
How to Know If You Have Negative Equity
This is pretty straightforward. You need two numbers.
Your payoff amount. Call your lender or check your online account. Ask for the exact payoff amount, not just your remaining balance. This is what it would cost to pay off the loan today.
Your vehicle’s current value. Check what similar vehicles with similar mileage are actually selling for. Look at Canadian Black Book, AutoTrader listings, or get a trade-in quote from a dealership. Be realistic about the condition and mileage.
Subtract the value from the payoff amount. If the number is positive, you have negative equity. If it’s negative, you have positive equity.
What You Can Do About It
If you discover you’re upside down on your loan, you have a few options depending on your situation.
Keep the vehicle and keep paying. If the payment works for your budget and the vehicle fits your needs, this is often the simplest path. Eventually the balance drops below the value.
Make extra payments. If you can swing it, putting extra money toward the principal speeds up the process of getting right-side up.
Trade it in and roll the equity. Some lenders will let you trade in the vehicle and roll the negative equity into a new loan. This only works if the new financing makes sense and doesn’t just create a bigger problem down the road.
Wait for the right time. Sometimes the best move is to hold off on making any changes until you’ve paid down enough of the loan to close the gap.
Working with Negative Equity
At Approval Express, we work with people who have negative equity every single day. It’s one of the most common situations we see.
The key is understanding your real numbers and your real options. Not what you hope the numbers are, not what you wish your options were. What’s actually possible based on your payoff amount, your vehicle’s value, and your budget.
Sometimes that means trading into something different makes sense. Sometimes it means staying put for now. Sometimes there are creative financing solutions that work. It depends entirely on your specific situation.
The Bottom Line
Negative equity is common, especially with longer loan terms and smaller down payments. It’s not a reflection on you or your financial decisions. It’s just how depreciation and auto financing math work.
What matters is knowing whether you have it, understanding how much, and making informed decisions based on real numbers instead of assumptions.
Want to know exactly where you stand? Apply at Approval Express and we’ll walk through your actual numbers with you. We work with Western Canadians dealing with negative equity situations every day. No pressure, no judgment, just honest answers about what’s possible for your specific circumstances.