Get a free, no obligation personal loan quote with rates as low as 6.99%
Get Started You can apply with no effect to your credit score

Buying a car of any kind is a huge financial responsibility, one that can cause a lot of debt. In fact, a high-cost car can land you an upside-down car loan. This happens when your car loan is costing you more than your car is worth. If you have negative equity in your car, find out what you should do.

What Is An Upside Down Car Loan? 

Being upside down on your auto loan means you owe more on your loan than your car is worth. For instance, if your vehicle is currently valued at $8,500 but you still owe $10,000 on your car loan, you’re considered to be upside down on your loan. 

In this particular example, you’d be upside down by $2,500. That means if you sold your vehicle for $8,000, you’d still owe your lender the remaining balance of your loan, which in this case is $2,500. 

Otherwise referred to as being “underwater” on your loan or having negative equity, an outstanding loan balance that’s higher than your vehicle’s current value can put you in a predicament, especially if you ever want to sell your car in the future. 

Compare this to positive equity, which means your car is worth more than what you still owe on your car loan. For example, if your car is currently valued at $8,500 and you have an outstanding car loan balance of $4,000, then you would have $3,500 in positive equity. If you sold your car for what it’s worth, you would profit $3,500. 

Risks Of Being In An Upside Down Car Loan

You may be fine if you have an upside-down car loan, as long as you continue making payments. But any number of things can pop up that can put you in a vulnerable position if you carry negative equity, including the following:

You’ll Owe Your Lender More If You’re In An Accident 

If you’re involved in a collision that results in your car being totalled, your insurance provider will pay out the current value of your vehicle. That means, if your loan amount is more than what your car is worth, you’ll end up owing your lender the difference between your outstanding loan balance and the insurer’s payout (your car value). If you don’t have access to the cash needed to pay your lender, you could find yourself in a financial predicament. 

You Won’t Profit If You Sell 

If you need a different type of vehicle for whatever reason, you’ll want to sell your current car and trade it in for something that suits you better. For example, if you were driving a small sedan, you may need a larger vehicle to accommodate a growing family. 

If you sell your car with an upside down car loan, you’ll only get what it’s worth. That means you’ll still have to pay the difference between the loan balance and the amount you sell your car. 

You’ll Owe Money Even If Your Car Is Repossessed

If you find yourself unable to continue making your car loan payments, you may have no choice but to sell your car or have it repossessed. For instance, you may be laid off, have your hours cut, or become unable to work due to disability. If you’re forced to sell your vehicle or have it repossessed because your income has taken a dive, you’ll again be left owing your lender some money.

What Causes Your Car Loan To Become More Than Your Car Is Worth?

There are a few reasons you may end up with an upside down car loan. 

Low Down Payments

When purchasing a vehicle from a dealership, drivers also have the option of making a down payment in order to pay for it more quickly. However, if they choose not to or don’t make one that’s large enough, their regular car payments may not be big enough to keep up with the depreciation of the car

How Much Should You Put Down On A Car?

While 20% is usually the suggested down payment, it should be, at the very least, large enough to cover the cost of the vehicle’s immediate depreciation. Let’s say the car costs $30,000 but lost  11% of its value after you left the lot. So, your down payment should be at least $3,300, more if possible to reduce your payment period.   

High-Interest Rates

Negative equity can also happen if your interest rate is too high.  This can happen if your credit score was unfavourable or your financial situation is too risky to qualify for a more reasonable rate. High interest means it’ll take higher payments to cover more of the car’s principal balance. If your loan term is extended due to a high-interest rate, your payments may not be able to reduce your loan balance faster than the depreciation rate.  

Buying More Than You Can Afford

With car financing options ranging up to 84 months, borrowers may be buying cars they wouldn’t have been able to afford initially. The longer the car term, the higher the chance you’ll end up in an upside-down car loan. This is because the car will continue to lose value as you make the same loan payments over several years. 

How To Find Out If You Have An Upside-Down Loan?

To find out if you’re upside down on your car loan, you’ll need two pieces of information: your vehicle’s current value and your outstanding loan balance.

  1. Find out what your car is worth. You can use sources like Kelley Blue Book to estimate how much your car is currently valued based on its year, make, model, mileage, and condition. 
  2. Find out how much you still owe. Reach out to your lender or check the most recent loan statement to find out what your outstanding loan balance is.  
  3. Subtract the loan balance from your car’s current value. If the result is negative, then you’re upside down on your loan. The answer you get from the equation will tell you exactly how much negative equity you have.

What Should You Do If Your Car Loan Is More Than Your Car Is Worth?

Whether you financed your car with a car loan or personal loan, if your loan is higher than what your car is worth, it is upside down. If that’s the case, there are a few things you can do to at least minimize your debt and get out from under it faster than you would by leaving it to chance. 

Refinance Your Car

You can reduce your outstanding car loan by paying it off sooner. To do that, you can refinance your current car loan, which essentially involves taking out a new car loan to replace your existing one. Ideally, you’ll refinance with a lower interest rate and more favourable terms, especially if your credit score has improved. With a lower rate, you’ll owe less in interest, which will reduce your overall loan amount. 

You can also choose to refinance your loan with a shorter loan term. This will increase your monthly payments, but it will also help you pay your loan off sooner. Either way, refinancing can help you get out of an underwater car loan and get you back into positive equity territory.

Make Extra Payments 

If you have the financial means, consider making extra loan payments. Many lenders allow borrowers to make one extra lump sum payment per year toward paying down their loans more quickly. Not only will this help you work toward having positive equity in your car, but it will also help you pay your loan off faster since these extra payments go toward the principal portion of the loan.    

Keep in mind that some lenders charge an early repayment penalty fee for paying off your loan before the original term expires. Find out if your lender charges this fee, and how much it is. Then, crunch the numbers to make sure these charges don’t cancel out any savings from repaying your loan early. 

Consider Trading Down

While it might pain you to do so, trading your vehicle in for something more reasonably priced could save you a lot of stress down the road. You can bring your vehicle back to the dealership, trade it in for an older model or something more used. True, you will likely be taking a significant loss from what you initially paid, but your monthly payments and insurance rate will likely be much lower.  With a cheaper car, you’ll be able to afford a shorter loan term which can help with creating positive equity.

How To Avoid Getting In An Upside Down Loan?

The best way of getting out of an upside down car loan is to avoid getting into one in the first place. Follow these tips to prevent being underwater on your loan:

Buy A Used Vehicle

Buying a new car and financing it with a very long loan term can put you at risk of becoming upside down on your loan. New cars depreciate the moment you drive off the dealer’s lot and decline in value faster than used cars. Instead, used vehicles depreciate at a much slower rate. 

Consider buying second-hand to reduce your odds of finding yourself underwater on your loan and to reduce the amount you have to borrow. 

Lease Instead 

With a car lease, you don’t actually own the vehicle. Instead, leasing is somewhat like long-term renting. At the end of your lease, the car won’t be your responsibility anymore, so you won’t have to worry about becoming upside down on a loan. 

Plus, leasing allows you to have a newer vehicle every few years without having to worry much about maintenance and repairs.

Make A Larger Down Payment

You can lower the overall amount you have to borrow by making a down payment of at least 20%. The less you owe, the lower the odds of ending up with an upside down car loan.

Choose A Shorter Loan Term

A shorter term might mean higher installment payments, but it also helps you keep up with the car’s depreciation rate. Plus, you’ll pay your loan off sooner, which means less spent on interest. 

Buy GAP Insurance

A Guaranteed Auto Protection (GAP) plan protects you if you have negative equity and your car is totalled in an accident while you still owe a balance on your car loan. 

Bottom Line

When it comes down to it, you will pretty much always end up paying more than a car itself is worth, especially if the car is new or only gently used. This is mostly due to the interest payments associated with all forms of financing. Dealerships and other lenders need to charge interest for their products, otherwise, they wouldn’t be making a profit. When buying a dealership car, you’re not only paying the initial price tag, you’re paying interest on top of it. Therefore, no matter what shape the car is in or how quickly you manage to pay it off, you’re still paying more than the car is worth. The key, however, is to determine just how much more you’ll end up paying and try to reduce that price as much as possible before you sign any contracts.

Upside Down Car Loan FAQs

Can you sell a car with a loan on it?

Before you sell a car that you’re still financing, you’ll first need to settle the loan. When you take out a car loan, the lender will place a lien on the title, which will remain until you fully repay the loan. Until then, you don’t technically own the vehicle outright and will need to settle the financing first in order to be legally able to sell it.

What is negative equity?

Negative equity means the amount you still owe on the car loan is more than what your car is worth. For instance, if you owe $10,000 on your auto loan but the sale value of your car is $8,000, then you have $2,000 in negative equity.

How fast do cars depreciate?

New cars lose their initial value rapidly. In fact, some new vehicles can lose up to 20% in value in the first year, and up to 60% of their value after 5 years. That said, the average rate of depreciation is anywhere from 20% to 30% per year. New cars lose value faster during the first couple of years, which is why many consumers choose to buy used.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

More From This Author

Special Offers

More From Our Experts
Loans Canada places No. 228 on The Globe and Mail’s fifth-annual ranking of Canada’s Top Growing Companies.

By Caitlin Wood, BA
Published on September 29, 2023

Loans Canada is excited to announce it has made it onto the Globe and Mail’s Top Growing Companies list for the second year in a row.
Finder Awards Finalists: Personal Loans Customer Satisfaction Awards 2023

By Priyanka Correia, BComm

Loans Canada is happy to announce it received the finalist award in the Best Personal Loan Search Platform category.
Beware of Fraudulent Lenders Impersonating Loans Canada

By Caitlin Wood, BA

A note to our clients about fraudulent lending practices and illegal upfront fees.
H&R Block Review

By Lisa Rennie

Filing taxes can be complicated. Thankfully, tax software like H&R Block exists. Check out our review on H&R Block tax software.
Fixed vs. Variable Rate In 2024 | Which Should You Choose?

By Lisa Rennie

Check out the mortgage interest rate trends for 2024. Find out whether you should opt for a fixed or variable rate mortgage in 2024.
Do You Qualify For The Newfoundland And Labrador Child Benefit (NLCB)?

By Corrina Murdoch

Find out if you qualify for extra cash under the Newfoundland and Labrador Child Benefit (NLCB).
Why Lower Interest Rates Won’t Solve The Housing Crisis: Root Cause Is Supply Shortage

By Maidina Kadeer, BA

Find out why BOC's Governor Tiff Macklem says supply shortage is the root cause of Canada's housing affordability crisis.
What Is The Average House Price In BC 2024?

By Lisa Rennie

Home prices vary a great deal across Canada. Check out the average house price in BC and how it compares to the rest of Canada.

Recognized As One Of Canada's Top Growing Companies

Loans Canada, the country's original loan comparison platform, is proud to be recognized as one of Canada's fastest growing companies by The Globe and Mail!

Read More

Why choose Loans Canada?

Apply Once &
Get Multiple Offers
Save Time
And Money
Get Your Free
Credit Score
Expert Tips
And Advice

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.

Koho Prepaid Credit Card