Negative equity happens when you owe more on your vehicle than what it is worth. During my career i would say about 90% percent of my customers with a trade had negative equity.
There are several things that cause negative equity.
1. Large Rebates at new purchase time.
There were several times I would have a customer want to trade a vehicle within 6 months of them buying it new. Sometimes, the trade was so new there was no listing in the books for a used car price, so how we appraised was to find an invoice on a like vehicle, look up what the rebates were at the time of purchase, then subtract the rebates from the invoice. Then we would take that number and subtract 3500-4000 dollars. So even if you got an invoice deal minus rebates, you are still probably in the bucket 4000k. The lower the rebate at the time of purchase, the more you are going to be upside down.
2. No money down at time of purchase
A lot of folks don't put money down, or just put the rebates down. This is fine if you don't have the cash on hand, but the more you finance on a car, the more negative equity you will have.
3. High supply and low demand for your type vehicle
Have you seen an influx of SUV's on used car lots lately? Because of high gas prices, a lot of people are trading for more fuel efficient cars. When the supply goes up and the demand goes down, the price must come down. Unfortunately for customers trading their vehicles, the value of their trades go down as well.
4. Wear and Tear
Cars are a depreciating asset. It doesn't matter if you buy one from the showroom floor, have it hauled to your garage, and not drive it the next three years. It will never be worth what you paid for it. (Well, in dollars it might, but if that happens then the dollar doesn't have the same value as when you purchased the car.)
OK, so now you know about what causes negative equity, you might be asking yourself what you can do about it.
1. Ride it out.
Most people don't like this option, but unless you absolutely hate your vehicle sometimes it is the most sensible one.
2. Put a large amount of money down.
A lot of folks can't afford to do this, but if you can it is the best way to get out of negative equity.
3. Buy a new car with huge rebates.
This works for a lot of folks, but he problem is rebates are put on cars by manufacturers to help them sell. If you are interested in a model that doesn't need a rebate to sell, then this option is not for you.
4. Buy a car on a short term lease program.
A lot of the manufacturers in house financing companies will buy a lot of negative equity on a short term lease, because if you lease a vehicle for three years, when you turn it in the negative equity is over. Leasing is the best way to avoid negative equity in the first place, so long as you keep the vehicle for the entire term of the lease. Unfortunately this does not work for folks who put a lot of miles on their vehicles.
I hope this helps, if you have any questions let me know.