Negative equity is simpler than it sounds. When you owe more on a car than it is worth, you are in negative equity. This can happen fairly easily. It will also only happen if you have car finance. Let’s break down what this means and how it can happen.
You owe more money than your car is worth. This is negative equity. If you owe £4,000 to your finance company, but your car is now valued at only £3,000, you have £1,000 in negative equity.
Usually, car finance contracts balance out. This is because the car’s depreciation slows down as you continue making regular payments. Depreciation value is the rate at which something loses value.
Getting into negative equity can happen really easily. Here are some of the ways you can end up in negative equity:
Having negative equity can lead to lots of problems. This is even more likely if you struggle financially, especially in meeting payments. With your loan balance worth more than the actual car, trading it in won't cover you. This could lead to late fees if you miss payments.
The chances of being in negative equity change depending on the type of car finance you choose. Here’s how it works for hire purchase (HP) and personal contract purchase (PCP) agreements:
Hire Purchase and Negative Equity:
With HP, you pay a fixed monthly fee and own the car outright at the end of the term. It’s less common to fall into negative equity with HP. This is because you’re paying off the car’s total value more quickly than with a PCP agreement. With it being quicker, there's less time for the value of the car to fall. However, suppose you do end up in negative equity. In that case, you can cancel your current HP agreement and take out a loan for a cheaper vehicle, incorporating the negative equity.
Negative Equity with PCP:
PCP typically offers lower monthly payments due to an optional balloon fee at the end of the deal. This often results in the amount owed exceeding the car’s value. If you have PCP car finance with negative equity, you do have some options.
Several factors can lead to car finance negative equity:
If you find yourself in a negative equity situation, you have several options:
While it’s not always avoidable, there are steps you can take to reduce the risk of negative equity:
Already dealing with negative car equity? We can help. Marsh Finance can help you explore negative equity car finance options that suit you. We offer hire purchase (HP) and personal contract purchase (PCP) plans. We’ll guide you through the process, making sure you get the best deal. Explore our car finance options today.
Negative equity in car finance is a common challenge. Still, it can be managed with the right approach and financial guidance. It doesn't matter if you need to address negative equity, or avoid it altogether. Make sure you understand the factors at play, as well as the options on the table. This is key to making informed decisions about your car finance.
Negative equity is when the value of your vehicle is less than the outstanding balance of your car loan. In essence, it means that you owe more money on the loan than the car is worth.
If you have negative equity, you may struggle to sell, or part exchange your vehicle. If this happens, you may be asked to pay the difference out of your own pocket or roll the negative equity into a new car loan.
You can fall into negative equity for a number of reasons. It may be that the car you have purchased has depreciated faster than expected, or it could be because of the interest rate on your loan.
Yes, you can change your car while in negative equity, but you’ll usually need to settle the difference between its worth and what you still owe. Some lenders or dealerships may help by rolling the shortfall into a new finance deal, but this can be expensive.
Being in negative equity can limit your options for new car finance. Lenders may see you as a higher risk, especially if you’re looking to borrow more than the value of the new car. You may need a larger deposit or to clear the shortfall before starting a new agreement.
If you can’t afford to pay the negative equity upfront, some lenders might allow you to refinance or extend your loan. However, it’s important to consider the long-term cost of borrowing more. Speaking to your lender or a car finance broker can help you understand your options.
Yes, but you’ll need to cover the negative equity somehow. This usually means paying the difference in cash or adding it to your new finance agreement. Keep in mind that rolling over negative equity can make it harder to build equity in your new car.
Voluntary termination under the Consumer Credit Act (Section 99) allows you to return the car once you've paid 50% of the total finance amount (including interest and fees). If you're in negative equity but have passed the 50% mark, you can exit the agreement, but you won’t get any money back, and it won’t clear the gap between what the car is worth and what you still owe.
Negative equity itself doesn't directly affect your credit score. However, missing payments or defaulting on your finance agreement due to affordability concerns can damage your credit rating.
If you’re looking to reduce the negative equity on your car finance agreement, you can:
It’s not always possible to avoid negative equity in your car finance agreement. Market changes can often have a big impact as used car prices can fluctuate dramatically. However, here are some tips on how to minimise the risk of negative equity:
It depends. The negative equity on a car depends on things like the initial loan amount, the vehicle's depreciation rate, and any additional fees or interest you have accrued. It could be as little as a couple hundred pounds, but for some, it could be thousands. The amount of negative equity ultimately depends on the car itself and the state of the used car market at any given time.
Some gap insurance policies may cover negative equity, but only in specific situations, such as if your car is written off or stolen, and the insurance payout is less than your outstanding car loan balance. However, it’s important to check with your own insurer as coverage varies depending on your policy terms and conditions.
Yes, putting down a larger deposit can help reduce the likelihood of negative equity by lowering the initial loan amount and decreasing the gap between the car's value and the loan balance. However, this isn’t an exact science. Factors outside of your control, such as depreciation and used car prices, can force you into negative equity even if you have put down a big deposit.
If you’re financing a car on PCP (Personal Contract Purchase), it may not be a good idea to put down a large deposit. This is because of the risk of depreciation in the cars value, so we’d definitely recommend that you seek advice before making any big decisions.
While negative equity can sound daunting, it’s quite common and shouldn’t necessarily be seen as an issue for immediate concern. However, we’d recommend that you address negative equity proactively to avoid any potential financial difficulties down the line. If you’re able to, making additional repayments can help to reduce negative equity.
Yes, you can downgrade your car on finance. However, it’s important to think about your options, especially if you have negative equity on your current vehicle. Downgrading to a cheaper car may help you reduce your monthly repayments, but if you have negative equity on your current vehicle, you may be asked to pay the shortfall before being approved for a new loan.
No. Negative equity itself does not impact your credit score. However, if you miss any payments or default on the loan due to negative equity, this will impact your credit score. It’s really important to stay on top of loan payments and take a proactive approach to negative equity to avoid any negative effects on your credit score.