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OMVIC’s Guide to Understanding and Avoiding Negative Equity

October 8, 2025
Blogs

October is a great time to get your finances in order – before the holiday season and the new year. To help Ontarians make smart car-buying decisions, the Ontario Motor Vehicle Industry Council (OMVIC) is launching a three-part series on financial tips for vehicle purchases. This first article focuses on negative equity, a common but often misunderstood problem.

What is Negative Equity

Negative equity happens when you owe more on your car loan than your car is worth. For example, if your loan balance is $25,000 but your car is only worth $20,000, you have $5,000 in negative equity.

These situations can arise because vehicles depreciate quickly, while long-term loans can take years to repay. According to Clutch.ca, nearly 25 per cent of Canadian car owners have negative equity, with the average amount owed above the car’s value at about $7,700.

Why Negative Equity Matters

Negative equity can affect your money now and in the future:

  • Rolling debt forward: If you trade in a car with negative equity, the unpaid balance may be added to your next loan, keeping you in debt.
  • Paying interest on old debt: You end up paying interest on a car you no longer own.
  • Less flexibility: It’s harder to sell or trade your car if you owe more than it’s worth.

How Negative Equity Happens

You are more likely to have negative equity if you:

  • Make little or no down payment.
  • Choose long loan terms (7–8 years).
  • Buy a new car that loses value quickly.
  • Roll old loan balances into a new loan.

How to Protect Yourself

  • Know your budget before you buy.
  • Make a down payment to lower the loan amount.
  • Choose a shorter loan term, even if the monthly payments are a bit higher.
  • Shop around for the best interest rate. Don’t accept the first offer and watch out for inflated rates.
  • Check resale values before buying.
  • Avoid rolling old debt into new loans.

OMVIC and Your Rights

OMVIC enforces the Motor Vehicle Dealers Act (MVDA), which requires dealers to be fair, honest, and transparent. While negative equity is a financial choice, dealers must clearly explain:

  • Loan terms
  • Trade-in values
  • All contract details

This means you have the right to fully understand your agreement before signing.

OMVIC also offers free resources:

  • Guides, videos, and webinars about financing and car-buying rights.
  • Support in over 150 languages.
  • Consumer support staff to answer questions about contracts or dealer rules.

Final Thoughts

Buying a car is one of the biggest financial decisions many Ontarians make. By understanding negative equity, negotiating your loan terms, and shopping around for the best rate, you can protect your money and your peace of mind.