An upside down loan, also known as negative equity, occurs when a borrower owes more on a loan than the current value of the asset securing it, such as a car or house. This situation typically arises when an asset rapidly depreciates in value or when a borrower takes out a loan with unfavorable terms, like minimal down payments or long repayment periods. If the asset is sold, the borrower must cover the difference out of pocket. Upside down loans can pose significant financial challenges.