Negative Equity: what does it mean in Canadian car loans?

Negative equity" in Canadian car loans signifies a situation where the outstanding balance on your vehicle loan is greater than the vehicle's current market value, often termed being "upside down." This common scenario arises from factors like rapid vehicle depreciation, especially for new models, combined with extended loan terms (e.g., 84 or 96 months), minimal down payments, or the practice of rolling over existing negative equity from a trade-in. In the context of 2025 Canadian market conditions, where used vehicle values might stabilize or soften after recent highs and interest rates remain elevated, the prevalence and impact of negative equity are significant. Provincial sales taxes (PST/HST) also play a role, as these are financed into the loan but do not contribute to the vehicle's resale value, immediately creating a deficit. Why this matters critically to consumers is that if your vehicle is stolen, totaled, or you decide to sell or trade it in, you are personally responsible for the difference between the insurance payout or sale price and your remaining loan balance, potentially incurring substantial out-of-pocket costs. This can perpetuate a cycle of debt, as financing negative equity into a subsequent loan inflates the principal, increases monthly payments, and dramatically elevates the total cost of vehicle ownership across multiple vehicles. While Canadian consumer protection laws emphasize clear disclosure of the total cost of borrowing, including any rolled-over debt, borrowers must proactively understand these long-term financial implications to avoid being trapped.