Negative equity happens when the market value of your car is less than the amount you have left to pay on your car loan. In other words, if you tried to sell your car, you likely wouldn’t be able to get more than what you already owe on it. This is sometimes referred to as being “underwater” or “upside down” on your loan.

Negative equity can occur if you purchase a new car and take out a loan for a large portion of the purchase price, because the value of a new car decreases sharply when you drive off the lot. It can also happen if you entered a car loan with a relatively long term or the resale value of your car falls due to quality issues with that model.