Owe More Than Your Car Is Worth? How Negative Equity Works in Canada (and Your Options)

Negative equity on a car loan means you owe more on the loan than the vehicle is currently worth. If your payoff balance is $25,000 and the car would sell for $20,000, you have $5,000 in negative equity. People also call this being "upside down" or "underwater" on a car loan. It is common, and there are several ways to deal with it.

Key takeaways

• Negative equity = your loan payoff amount minus your vehicle's current market value, when the payoff is higher.
• Long loan terms (84–96 months), small down payments and normal depreciation are the most common causes.
• You can trade in a car with negative equity, but the shortfall usually gets added to your next loan, which makes that loan bigger.
• Your options include keeping the car and paying it down, making extra payments, refinancing, selling privately and covering the gap, or trading in and rolling the balance over.
• Get your exact payoff amount from your lender and a realistic value for your car before you decide anything.

If you have an existing car loan and you are thinking about trading in, refinancing or getting out of the loan altogether, this guide walks you through what negative equity is, how to check whether you have it, and the honest pros and cons of each way out.

What is negative equity on a car?

Negative equity is the gap between what you still owe on your car loan and what your car is worth today, when you owe more than it is worth. It is not a fee or a penalty. It is simply the difference between two numbers.

Equity works the same way it does with a house. If your car is worth more than your loan balance, you have positive equity, and that difference can go toward your next vehicle. If the car is worth less than the balance, the difference is negative equity, and it has to be paid somehow if you sell, trade in or close the loan early. You can find this and other terms explained in plain language in our auto finance glossary.

Having negative equity is not a problem in itself if you plan to keep the car and keep making your payments. It becomes a problem when you want or need to get out of the vehicle before the loan catches up with its value, for example because your family has grown, your commute has changed, the car needs expensive repairs, or the payment no longer fits your budget.

How do I know if I have negative equity?

Compare your loan payoff amount with your car's current market value. If the payoff amount is higher, you have negative equity, and the difference is how much.

Here is how to get both numbers:

1. Ask your lender for a payoff amount. This is not always the same as the "balance" on your statement. Ask your lender for a written payoff amount for a specific date, including interest owing up to that day. Check your loan agreement and the rules in your province or territory for any charges or conditions that may apply to paying it off early.
2. Find out what your car is worth. Look at what similar vehicles (same year, make, model, trim, kilometres and condition) are actually selling for near you. Keep in mind that a dealer's trade-in offer is usually lower than a private sale price, because the dealer has to recondition and resell the vehicle. For a quick, no-obligation number, you can request an offer for your vehicle.
3. Subtract. Payoff amount minus market value. A positive result is your negative equity. A negative result means you actually have positive equity.

Check this before you walk into a dealership. Knowing your real numbers makes it much easier to understand any offer you are given.

Why are so many Canadians upside down on their car loans?

Mostly because cars lose value quickly while long loans pay down slowly. When the balance shrinks more slowly than the car depreciates, the loan ends up worth more than the car.

A few factors usually work together:

• Depreciation. Vehicles lose value as they age and add kilometres. The Financial Consumer Agency of Canada explains that new cars depreciate quickly, although the amount varies by vehicle and circumstances. Your loan balance does not drop at the same speed.
• Long loan terms. Terms of 84 and 96 months are widely offered in Canada because they lower the monthly payment. The trade-off is that each payment pays off less principal, especially early in the loan, when more of each payment goes to interest. The longer the term, the longer it takes for the balance to fall below the car's value.
• Small or no down payment. $0 down can help you get into a vehicle you need, but it means you start with no equity cushion. On day one the loan may already be close to, or above, what the car would sell for.
• Taxes, fees and add-ons financed into the loan. Sales tax, extended warranties, protection packages and other products can all be added to the amount financed. They increase what you owe without increasing the car's resale value.
• Negative equity from a previous car. If an earlier shortfall was rolled into the current loan, you start the new loan already behind.
• Higher interest rates. A higher rate means more of each payment goes to interest rather than principal, which slows down how fast you build equity.

None of this means you made a bad decision. A longer term can be the right call for your monthly budget. It just means it is worth knowing where you stand before you change vehicles.

Can I trade in a car with negative equity?

Yes. Many dealerships will accept a trade-in that still has more owing than it is worth. The catch is that the shortfall does not disappear: it is usually paid off by adding it to the loan for your next vehicle.

When you trade in, the dealer pays off your existing lender. If the trade-in value is less than the payoff amount, the difference has to be covered. You can cover it with cash, with a rebate or incentive if one applies, or by rolling it into your new loan. Whether a lender will finance a shortfall depends on its assessment and the terms it offers. Ask for the full amount financed and total borrowing cost before agreeing.

If you are thinking about trading in, ask the dealer to show you, in writing, the trade-in value, the payoff amount and the exact amount of negative equity being added to the new loan. Our sell or trade your car page explains how we help with this.

What happens when negative equity is rolled into a new loan?

Your new loan becomes bigger than the price of the vehicle you are buying. You pay interest on the old shortfall, your payment is higher than it would otherwise be, and you start the new loan with negative equity again.

A worked example (illustration only, not a quote)

The numbers below are simple round figures to show how the math works. They are not an offer, a rate or a quote, and they leave out taxes and fees to keep things clear.

• Payoff amount on your current loan: $25,000
• Current value of your car (trade-in offer): $20,000
• Negative equity: $25,000 − $20,000 = $5,000

Now say the next vehicle you want costs $30,000 and you have no down payment.

• Price of the new vehicle: $30,000
• Your trade-in value covers your old loan only partly, so the $5,000 shortfall is added
• New loan amount: $30,000 + $5,000 = $35,000

You are now borrowing $35,000 for a vehicle worth $30,000 the day you drive it away, and less after that as it depreciates. You also pay interest on that extra $5,000 for the whole term. If you wanted to change vehicles again in a few years, the gap could be even larger than it is today.

Want to see what a bigger balance does to your payment? Try different amounts and terms in our car loan calculator. Comparing a $30,000 loan with a $35,000 loan over the same term shows you the real cost of rolling the difference over.

Rolling negative equity over is not always wrong. If your current car is unreliable or too expensive to keep, it can be a reasonable move. Just make sure you understand the new balance and do it with your eyes open, ideally with a shorter term or a down payment so the cycle does not repeat.

Can I refinance a car with negative equity?

Sometimes. Some lenders will refinance a loan that is worth more than the vehicle, but many limit how much they will lend relative to the car's value, so approval depends on the lender, your vehicle and your financial situation.

Refinancing means replacing your current loan with a new one, ideally with a lower interest rate, a different term or a lower payment. It does not erase negative equity, because the new loan still has to pay off the full balance of the old one. What it can do:

• Lower your interest rate if your credit has improved since you signed, so more of each payment goes to principal and you build equity faster.
• Shorten your term to pay the balance down faster, if you can afford a higher payment.
• Lower your payment by extending the term, which helps your monthly budget but can keep you upside down for longer.

Before you refinance, check your current loan agreement and ask your lender whether any charges or conditions apply to paying it off early. Compare the total cost of both loans, not just the monthly payment. Learn more on our refinance your car page.

How do I get out of negative equity?

The most reliable way is to keep the car and pay the loan down until the balance falls below the car's value. If you need to get out sooner, you can cover the gap with cash, refinance, or roll it into a new loan, each with trade-offs.

Comparing your options

Option	How it works	Pros	Cons
Keep driving and pay down	Make your regular payments until the balance drops below the car's value.	No extra cost; equity builds naturally over time.	Takes time; you keep a car that may no longer suit you.
Make extra payments	Add lump sums or extra amounts toward principal.	Closes the gap faster and can reduce total interest.	Needs spare cash; check your agreement and with your lender whether extra payments are allowed and whether any charges or conditions apply.
Refinance	Replace your loan with a new one at a different rate or term.	May lower your rate or payment; a shorter term builds equity faster.	Approval not guaranteed; a longer term can keep you upside down longer.
Sell privately and cover the gap	Sell the car yourself, usually for more than a trade-in, and pay the difference to the lender.	Often the highest sale price; ends the debt cleanly.	You need cash for the shortfall; the lender must be paid before ownership transfers; more work.
Trade in and roll it over	The dealer pays off your loan and adds the shortfall to your new loan.	Fast and convenient; gets you out of a car that no longer works for you.	Bigger new loan, more interest, and you likely start the new loan upside down.

A few practical steps help whichever route you choose:

• Get exact numbers first: a written payoff amount and a realistic market value.
• Look at total cost, not just the monthly payment. A lower payment over a longer term can cost more overall.
• Consider a down payment on your next vehicle to offset some or all of the negative equity.
• Choose a shorter term next time if your budget allows, so your balance keeps pace with depreciation.
• Read the contract carefully before signing, including any add-ons being financed.

The Financial Consumer Agency of Canada has independent, plain-language information on financing a car, including how loan terms affect what you pay. If your credit is part of the picture, our bad credit car loans page explains how we work with every credit situation.

Talk to an Auto Expert about your options

Negative equity can feel stressful, but it is a numbers problem, and numbers can be worked through. An Auto Expert can look at your current loan, your vehicle and your goals, and walk you through which option makes the most sense for you. There is no cost and no obligation to talk it through.

Speak to an Auto Expert or call 1-855-550-5565. When you are ready, you can start your free online application in a couple of minutes.

Sources and further reading

• FCAC: Financial risks when buying a car — depreciation, negative equity and borrowing a shortfall.
• FCAC: How you are protected when buying a car — loan disclosures and federal, provincial and territorial protections.
• FCAC: Credit report and score basics — loan balances, payment history and credit scores.