Financial and Consumer Affairs Authority of Saskatchewan

FCAA is Saskatchewan’s financial and consumer marketplace regulator.

Negative Equity

  • Negative Equity


    Are you wanting to trade in your current vehicle? Do you still owe money on it?  Be careful, as taking on additional debt may put you in a poor financial position. Consumers who roll their auto debt into a new loan may find themselves in a position known as negative equity: owing more money on a vehicle than the vehicle is worth.

    Here are some tips to consider when purchasing a vehicle to avoid negative equity.

     

    Focus on the total cost
    Low monthly payments spread out over a longer period of time give the impression of affordability, but actually represent a much higher cost overall. A low monthly payment may seem attractive, but results in a longer payback term with more fees attached.

    When purchasing a vehicle, don’t focus on a low monthly payment. Know the total cost of the loan, including the price of the vehicle and the interest you will pay. Interest on a vehicle with low monthly payments may cost more in the long run.

    For example, the monthly payments shown below demonstrate two different loan options. If you look at the length of the term, interest paid and the total cost; Option B costs significantly more with the longer term. 
                                                                                                                                   

    Option A Option B
    Economy Car Economy Car
    Price: $22,000 Price: $22,000
    36 month term 72 month term
    5% APR 5% APR
    $659/month $354/month
    Interest paid: $1,736 Interest paid: $3,510
    Total cost: $23,736 Total cost: $25,510

     

     

     

     

     

     

     

    Another point to keep in mind is that your vehicle loses value the moment you drive it off the lot. For example, the above economy car purchased for $22,000, may drop several thousand dollars in value over a short period of time. Even though you will still be making the same monthly payments, the car might not be worth what you’re paying, if you decide to trade it in.

     

    How to avoid negative equity

    • Make a sizeable cash down payment when purchasing the vehicle.
    • Consider a shorter term loan to minimize the possibility of being in a negative equity position.
    • Pay off existing vehicle loans to avoid rolling negative equity forward into a new vehicle purchase.
    • Don’t just focus on the monthly payment when purchasing a vehicle, consider the total price of the vehicle and the length of the loan.
    • Have a budget in mind and stick to it.


    Call Consumer Protection Division
    If you have questions about negative equity loans, you can contact us toll free at 1-877-880-5550 or by email: consumerprotection@gov.sk.ca.

    Consumer Protection Division

    Suite 500, 1919 Saskatchewan Drive

    Regina, Saskatchewan S4P 4H2

    Tel: (306)787-5550

    Toll free: (877)880-5550

    Fax: (306)787-9779

    Email: consumerprotection@gov.sk.ca

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