Negative equity, commonly known as being "upside down" or "underwater," arises when the outstanding balance on your existing vehicle loan surpasses the current market value of that vehicle, meaning you owe more than it's worth. This phenomenon is becoming increasingly prevalent in the Canadian auto finance landscape heading into 2025, largely driven by a confluence of factors: rapid depreciation of used vehicles post-pandemic, persistently elevated interest rates impacting loan amortization, and the widespread adoption of longer loan terms (e.g., 84 or even 96 months) which slow down principal reduction relative to the vehicle's value decline. When a vehicle with negative equity is traded in, the deficit - the difference between the loan balance and the trade-in value - is typically "rolled over" and added to the principal of the new vehicle loan. This immediate inflation of the new loan's principal significantly increases your total borrowing amount from day one, leading to substantially higher monthly payments, a greater accumulation of interest charges over the new loan's extended term, and a heightened probability of starting your new vehicle ownership already in a negative equity position. For Canadian consumers, understanding this mechanism is paramount because it directly impacts your financial health, credit utilization, and future purchasing power, potentially trapping you in a cycle of debt and limiting access to favourable financing terms for subsequent purchases.