What is Negative Equity in Car Finance?

If you're in a negative equity position it means you owe the car finance company more than your car is worth.

Negative equity is a common term used in mortgages, but it's also something to consider and be aware of when it comes to car finance.

Everyone with a car on finance will be in negative equity at some point, and that's not a problem; this will generally be in the first two years of owning it.

Negative equity in cars occurs because cars depreciate in value so quickly. As soon as you drive a brand-new car off of the dealer's forecourt, it starts to lose its value.

Do you know if your car is in a positive or negative equity position? Find out for free today and see if you are eligible to upgrade your car or save money on your car finance deal.

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However, at the time of writing, used car prices are at an all-time high, meaning that cars are currently worth a lot more than they perhaps should be worth. 

Your car could be in a positive position, even if you don't think it is. At Car Credible, we can help to determine your car's equity position and from there, can help you get into a new, better deal with a newer car and cheaper monthly repayments.

An example of negative equity in car finance

If your car is worth less than the amount that you still owe the finance company, then your car will be in a negative equity position.

A simple breakdown of how this might look is if your car is worth £20,000 and you've paid two months of your finance at £250 per month. However, while this has happened, your car has depreciated by £1,000, now making its value £19,000.

But, after two months, you've only paid off £500, so you still owe the finance company £19,500. But the depreciation means your car is valued at £19,000, so you are £500 down, also known as being in £500 of negative equity.

New cars depreciate rapidly in the first few weeks after you've bought them, but over time the decline does ease off, and that allows you to catch up on your monthly repayments and ultimately get into a positive equity position.

It can make it more difficult for you to shift your car early, though, but that is where refinancing comes into play. Car Credible can help you refinance your car, and get you into a better deal, saving you money along the way. View your options today.


Negative equity on a PCP 

A Personal Contract Purchase (PCP) agreement is a type of car finance deal that requires you to pay a lump sum at the end of the contract if you wish to own the car outright. This is also known as a 'balloon payment'.

The balloon payment sum is calculated by the dealer and is the figure they believe the car will be worth due to depreciation when your contract ends. In the meantime, you make monthly repayments to cover the cost of the difference between the balloon payment and the cost of the car when you originally buy.

You will make smaller monthly repayments because you don't pay for the balloon until the end; this means you're likely to spend a longer period of time in a negative equity position because you aren't paying off as much in as quick a time as you perhaps would on a Hire Purchase (HP) agreement.

Once you reach the end of your PCP, you should be in a positive equity position. 

In the likely event that you are in a negative equity position (the car is worth less than the balloon), you will be free to hand the car back to the lender with no extra charges, providing the car is still in a good condition and you haven't exceeded any mileage limits.


When negative equity could be problematic

You write off your car or it gets stolen 

  • Your car insurance would cover the market value of your car, but in a negative equity position, it would mean you have to fork out the extra to cover the costs. GAP insurance is a good extra to purchase when you buy a new car as this would pay the additional costs if this situation ever were to happen.

You want to trade in your car

  • You might get bored with your car or feel you're paying too much and want to trade it in for something different. In a positive equity position, the profit you have on the car can be put forward to the deposit on the new car, but in a negative position, you'd be required to pay the extra yourself. 

You want to sell your car on finance

  • You would need to get your early settlement figure from your lender to pay it off. But in negative equity, the settlement figure will be higher than what the car is worth, meaning you would be making no profit. Ultimately, you'd be better off with the car you already have.

Check your equity position and the options available to you for free.

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What to do if you're in negative equity

If you keep making your monthly payments, eventually you will get yourself into a positive equity position. It may be quite laborious and take you several months, but you will get there eventually.

If you are struggling to afford the monthly repayments and have already paid off 50% of the loan, you can voluntarily terminate your car at no extra cost to you by returning the car to the lender. This can be done regardless of your equity position.

How to avoid being in negative equity for too long

You could buy a used car as these depreciate far slower than new cars.

Putting down a larger deposit will mean you are closer to paying off the loan before you've even driven it off the forecourt. You'll be taking out less finance overall so in theory, you'll owe less than the value of your car.

If you reduce your term length and contribute larger monthly payments, you will pay off the debt much sooner and significantly reduce your time in negative equity.

Maintain your car in the correct way, ensuring it is always in a good condition and does not exceed any mileage limits. This is a factor in how quickly your car is predicted to depreciate so going beyond this will make the car less valuable than it perhaps could be otherwise.


What happens if my car is worth less than my balloon payment?

At the end of your PCP finance deal, if your car is worth less than your balloon payment you can simply hand the car back to the lender without paying another penny. They will take the financial hit on the vehicle.

Should I pay off negative equity?

If you want to get out of your car finance deal but are in negative equity, you should only consider making up the difference yourself if you have money saved and can afford it. If you can't, then you're likely better of sticking with your deal until you're in a positive position.