Negative Equity on a Car Loan — What Your Options Are

Negative equity means you owe more on the loan than the vehicle is currently worth. It is a financial position that affects which options may be available to you.

In short: negative equity is the difference between what you owe and what the vehicle is worth. The gap may change over time as the loan balance and vehicle value change, but it should not be assumed that time alone will eliminate it. What is available to you depends on the lender, the vehicle and your circumstances — so the useful first step is finding out the actual size of the gap.

What negative equity actually means

Every financed vehicle has two numbers attached to it: what you still owe the lender, and what the vehicle would realistically sell for today. When the amount owing is higher than the vehicle’s value, the difference is negative equity. You may also hear it called being “upside down” or “underwater” on a loan.

Vehicles can lose value faster than the loan balance falls, particularly earlier in ownership. Longer loan terms can increase the period during which negative equity exists because the principal may be paid down more gradually.

Negative equity by itself does not mean the loan is in default. It simply describes the relationship between the amount owing and the vehicle’s current value.

How to know whether you have it

Two figures answer the question:

What you owe. Ask your lender for the payout amount rather than reading the balance off a statement. The payout is the figure required to close the loan on a given date, and it is calculated by the lender.

What the vehicle is worth. A realistic selling price for your vehicle in its actual condition and mileage — not an optimistic listing price.

If the payout is higher than the realistic value, you are in a negative-equity position, and the difference is the shortfall. That comparison shows the size of the shortfall and helps identify which options may be worth exploring.

What your options may be

There is no single answer that fits every situation. What follows is the realistic range, not a recommendation — what applies to you depends on the lender, the vehicle and your circumstances.

Keep the vehicle and continue paying

If the current loan remains manageable, one option is to keep the vehicle and continue making the required payments. As the loan balance and the vehicle’s value change, the size of the negative-equity gap can change too. There is no guarantee that the gap will disappear by a particular date.

Pay the shortfall down

Where your loan permits additional principal payments, paying down the balance can reduce the negative-equity gap relative to the vehicle’s value. Check your loan agreement or ask the lender how extra payments are applied and whether any conditions or charges apply.

Sell, with the shortfall resolved

You can generally sell a vehicle that still has a loan against it, but any shortfall must be resolved as part of settling the loan. Selling the vehicle does not cancel the shortfall. In a negative-equity position, selling may require you to contribute money rather than receive money back.

The payout and discharge process is covered in detail in our guide to selling a car with a loan in Canada.

Trade, where that applies

Where a trade is possible, the shortfall still exists and still has to be accounted for somewhere in the transaction. It is not removed by trading, and it cannot be assumed that it will simply be absorbed into a new agreement.

Refinance, only if a lender offers a suitable structure

Refinancing replaces one loan with another. It may or may not be available in a negative-equity position, and it does not erase the shortfall — the amount owing is still the amount owing. Whether refinancing is useful depends on the financing available and on how the new rate, term, payment and total borrowing cost compare with the current agreement.

If you want to understand how refinancing works generally, see our car loan refinancing page.

Four things negative equity does not mean

It is not cancelled by selling, trading or refinancing. Negative equity is the difference between the amount owing and the vehicle’s value, so it can change as either number changes. If you act while a shortfall still exists, that shortfall still has to be accounted for in the transaction.

It cannot always be carried into new financing. Whether any shortfall can be included in another agreement depends on the lender and the transaction. It cannot be assumed.

Refinancing is not a fix. Refinancing changes the structure of what you owe. It does not reduce the amount owing by itself.

Selling does not automatically put money in your hand. In a negative-equity position, the sale proceeds go toward the loan and may not cover it.

Where to start

Get the payout figure from your lender and compare it against a realistic sale value for your vehicle. Until you have those two numbers, you cannot assess the options accurately.

Approved By Saini can look at a vehicle that still has financing against it and explain the options that apply to your situation. Final approval, rates and terms are determined by the lender.