Car loans as long as 84 months are leaving Canadians thousands of dollars underwater. Here’s how to avoid the debt treadmill trap

The FCAC specifically warns that consumers who roll negative equity into a new vehicle loan often end up in a cycle of debt, as every trade-in they make leaves them deeper in the hole. It’s a risk that’s higher for borrowers with lower credit scores, since lenders may require longer terms to keep monthly payments affordable — which only slows equity-building further.

How to mitigate negative equity

If you’re in the market for a new vehicle, here are several steps you can take — both before and after buying — to protect yourself from the negative equity trap.

Choose a shorter loan term

If your budget allows, opting for a 60-month (five-year) loan means you’ll pay off most of the debt around the same time the vehicle has lost much of its value. This alignment is important: Your loan balance drops in step with the vehicle’s market value, leaving you with positive or neutral equity when you’re ready to sell or trade in.

Shorter loan terms also reduce the total interest you pay. Because most of each early payment goes toward interest rather than principal, stretching the term over seven years means paying significantly more in interest on the same vehicle price.

Buy vehicles that hold their value

One of the most effective hedges against negative equity is to buy a vehicle with a strong resale history. According to Canadian Black Book’s 2025 Best Retained Value awards, the following vehicles best hold their value in the Canadian market:

• Toyota Tacoma: Best retained value, small/mid-size pickup category (for 17 consecutive years); Toyota 4Runner, best retained value, SUV category; Toyota C-HR, winner of Sub-Compact/Compact over the past two years
• Porsche: Dominated the Premium category with multiple wins across its 911, Macan and Panamera PHEV models
• BMW: Winner for electric category with its EV lineup
• Buick: Winner for Overall Brand

Vehicles with strong brand reputations for reliability — particularly Toyota and some Porsche models — consistently top the Canadian Black Book charts. Choosing from this list won’t eliminate depreciation, but it will slow it down compared to brands and models that drop faster in value.

Hold on to your vehicle until the loan is paid off

If you’re already locked into a long-term loan, the most straightforward strategy to avoid the debt treadmill is to hold the vehicle for longer. While it may be tempting to trade it in after five or six years, the FCAC shows that borrowers with 84-month loans can get stuck in a negative equity situation even that far into the term.

To completely eliminate the risk of carrying debt forward, the safest financial move is to hold onto the vehicle for the full seven years until the loan balance hits zero.

However, if keeping the car for the full term isn’t possible, holding on for another six months to one year before trading in can allow you to pay down more of the principal balance, help you shrink any financial gap and get closer to a break-even point.

Use cash incentives and manufacturer offers

Many automakers offer trade-in incentives and cash-back deals that can help offset negative equity. Brands whose vehicles depreciate faster tend to offer larger incentives because they need to help buyers bridge the gap between loan balances and vehicle values.

Before trading in, check the manufacturer’s current incentive programs and ask the dealership directly about loyalty bonuses or trade-in top-ups. These offers can sometimes reduce negative equity by $1,000 to $3,000 or more, depending on the vehicle and the time of year.

Make a larger down payment

The single most effective way to prevent negative equity from day one is to put more money down. Personal finance experts and automotive market researchers, such as JD Power, recommend the 20/4/10 rule: Put 20% down on a four-year finance term, and keep your total transportation costs at 10% or less of your monthly income — including car payments, fuel, insurance and maintenance. On a $63,000 vehicle, that's $12,600 up front — but it means your loan starts well below the vehicle's market value, giving you a significant buffer against first-year depreciation.

What you can do next

If you’re shopping for a vehicle or already carrying a long-term car loan, here are practical steps to improve your position:

• Get your buy-out quote: Ask your lender for your current loan buy-out amount and compare it to your vehicle’s trade-in value using Canadian Black Book (canadianblackbook.com) or a dealership appraisal. Knowing your equity position is the starting point.
• Run the numbers on refinancing: If you have a long-term loan at a high interest rate, refinancing to a shorter term may save you money in interest and accelerate equity-building — even if your monthly payment increases slightly.
• Pause before trading in: If you have negative equity, holding the vehicle for another six to 12 months can meaningfully reduce or eliminate it. Avoid rolling negative equity into a new loan.
• Speak to an accredited financial adviser: A Certified Financial Planner (CFP) can help you model the true cost of your financing plan and whether it’s affecting your broader financial health — including your ability to save, invest or manage other debt.
• Use the FCAC’s auto loan calculator: The Financial Consumer Agency of Canada offers free online tools to help Canadians compare loan terms and understand the total cost of borrowing. Visit canada.ca/fcac for resources.

— with files from Melanie Huddart