Negative Equity Car Finance

We've got all the information you need to know about your car finance deal if you have negative equity.

Did you know that around 90% of new cars get bought using a car finance plan? That's because, with car finance, you can budget in advance, be flexible with your agreement and afford the vehicle of your dreams. After all, you pay it off monthly in manageable chunks rather than all in one go with cash.

However, when you purchase a brand new car, the moment you drive it off the car dealer's forecourt, it rapidly loses value. It's also known as depreciation, and it's a natural process.

After three years, most new cars have lost around 60% of their original value due to the number of miles driven and general wear and tear. It's a natural process, and every driver who has purchased a new car will understand the value's decline.

Do you know your current equity position? Sign up with Car Credible today to discover your equity and the various options you may have available to you to help you with your deal.

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It means your vehicle is in a negative equity position from the get-go because you owe the finance company more than it is worth. As you make your monthly repayments and start owing the finance company less, you will see the equity position shift.

You will finally get to a point with your vehicle and repayments - usually between two and three years - that it reaches a breakeven point, and as you continue to repay your loan, your vehicle will become worth more than what you owe the finance company, thus putting you in a positive equity position.

What is negative equity?

Negative equity is when your vehicle is worth less than what you owe the finance company. It's part of the process of financing a car, and every new vehicle you buy is in negative equity for some time from the moment you drive it away for the first time.

An example of a negative equity position is if your vehicle is worth £10,000, but you still owe the car finance lender £12,000, your vehicle is in negative equity of -£2,000 because you owe £2,000 more than the vehicle's value, at that month of your deal.

Some models hold their value longer than others, so if you were looking to buy a car in negative equity for a shorter period, you could research to find out the best value for you.

After a couple of years, depreciation starts to slow down; it's typically in the first two or three years a car's value decreases rapidly. So after making your payments for a couple of years, you should see your vehicle's value overtake how much you owe the lender.

On a Hire Purchase (HP) finance agreement, you will most likely start in a negative equity position, and as your deal progresses and you make more payments, slowly start to break even and then get yourself into a positive position. 

On a Personal Contract Purchase (PCP) finance agreement, it's more variable because, at the end of a PCP, you have an optional final payment, also known as a balloon payment, which is based on the expected value of your vehicle when your agreement ends.

If your vehicle has lost value quicker than expected due to driving more miles than you initially expected and agreed - or picking up more wear and tear than hoped - you may find that the balloon payment is more than the vehicle's actual value.

Negative equity is also a factor if you ever wish to part-exchange your vehicle to get a new one because if you're in a negative position at that time, you would have to make up the difference between how much negative equity you have and the vehicle's actual value so you would essentially be losing money.

How do I know my vehicle's equity position?

If you want to know your vehicle's equity position, you can sign up for Car Credible. We will create your personalised dashboard where you can view your equity position, early settlement figure, outstanding finance, and more.

Not only will we show you your car finance deal in full, but we will also notify you when is the optimal time to get new finance or refinance your existing deal so you can get into the best deal to suit your circumstance.


Can I get new car finance with negative equity?

If you're currently in a car with negative equity and still have quite a few months until you're out of it, there could be options available to help you now rather than waiting around until you break even.

At Car Credible, we work with a panel of lenders, some of whom specialise in helping people with negative equity finance. If you want to switch your existing vehicle for a newer or cheaper model, we could help find you a lender that will combine the cost of clearing the negative equity and the price of a new car into your monthly payments. 

What can I do if I have negative equity?

If you currently have negative equity, you have four main options.

Keep making your monthly repayments

You could continue to make your monthly repayments, and if you are on an HP, you will own the vehicle outright at the end of the deal. Or if you're on a PCP, you could hand the car back to the lender and walk away without paying a penny more.

Make up the difference from your pocket

If you are desperate to get into a new car finance agreement by part-exchanging your existing vehicle but are in a negative equity position, you could make up the difference with your cash.

Apply for negative equity finance

Within your Car Credible dashboard, you could get your quote to see offers available. If you see one that absorbs your negative equity into your new finance deal, that could be an option for you to avoid paying anything out of pocket.

Voluntary termination

If you've paid off at least 50% of your car finance deal, including interest and your balloon payment if you're on a PCP, you could hand the vehicle back to the lender and walk away without paying a penny more.

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How can I avoid negative equity?

Unfortunately, it's not possible to avoid negative equity. Whether you buy a new or used car on finance, you will be in negative equity when you drive your vehicle off the dealer's forecourt.

Your vehicle's depreciation value is based on your mileage use and wear and tear, and the car market in general. For example, if car parts become more expensive to get hold of, fewer cars may be produced, therefore, increasing the value of used vehicles already in circulation. 

To help you get out of negative equity quicker, you could put a larger deposit down at the start, so you owe less per month to your lender or keep on top of your personalised dashboard within Car Credible to see how much longer your vehicle may be in negative equity.

Apply for car finance

To apply for new car finance and see your offers, you can click on the 'get my quote' button within your Car Credible dashboard. You'll then be directed to fill in a form that should take no more than five minutes.

It's free to get your quote, and there is no obligation to take out new finance if you do not like the offers available. There's also no impact on your credit score unless you actively apply for one of the finance offers shown to you.

Once you apply, you will get allocated a dedicated car finance account manager who will answer any questions and help get you into the best deal possible.


Does negative equity harm your credit score?

As long as you are continuing to make your monthly repayments on time, negative equity shouldn't impact your credit score. Negative equity isn't necessarily a bad thing, it's just a normal part of a car finance journey from taking out a loan to paying it off each month.

Will car finance lenders pay negative equity off for you?

If you have a car with negative equity and want to get into something different, your new lender may be happy for you to absorb the price difference into your new loan so you don't have to settle your existing finance deal and pay out of your own pocket.