Negative Equity Car Finance

What Is Negative Equity?

Negative equity is when the amount of money you still owe on your car finance agreement is worth more than the car itself. Let’s say you owe £4,000 on a car that’s worth £3,000. You’ll be in £1,000 of negative equity.

Negative equity can cause financial trouble for customers, who can’t write off their loan due to an excess being owed. There are plenty of ways to get into negative equity, but there are ways out, too.

Common Causes Of Negative Equity

Here are some of the most common reasons for ending up in negative equity:

• Switching up your car.
• Missed payments leading to a buildup in how much you owe.
• If you are unfortunate enough to have a car accident, and your insurance doesn’t cover it. The car's value declines significantly, and you end up with negative equity.
• The interest rate on your loan. If you have a higher interest rate, your monthly payments could be going towards the interest more and the car less, meaning your total repayment stays high.
• Trying to change your car too early into your agreement.
• A low or no deposit. Having a larger amount to repay, or potentially a deferred payment until the end of your agreement (PCP finance) can lead to negative equity.
• Rapid depreciation. The GMFV (Guaranteed Minimum Future Value) is only an estimation, and a car can lose value quicker than anticipated over time.
• High mileage and damage. The worse condition your car is in, the lower its value against the amount you still owe.

How To Get Out Of Negative Equity Car Finance

Found yourself in negative equity? Don’t panic! You have a few options to help navigate negative equity:

🤝  Stick with your current deal. If you’re committed to your car and don’t want to lose it, you can continue your agreement. Sometimes negative equity balances out over time.

✂️ Voluntary termination. If you’ve paid at least half of your total finance package, you may be able to return the vehicle. You’ll need to check with your car finance company, though, as you may face fees or conditions for terminating.

💳 Pay off the negative equity. Clearing the balance on your finance agreement removes the negative equity. This can give you a nice fresh start for your next deal.

➕ Consider making extra payments each month.

🔄  Part exchange your car for something cheaper.

Can You Add Negative Equity To A New Car Loan?

You can add negative equity to a new loan. You could choose to finance a cheaper car, which can reduce negative equity, although it’s unlikely to eliminate it fully. Transferring your negative equity to a new car is generally not advised, as clearing it is the best way to respond. In saying that, if you can’t afford to pay off negative equity, switching to a cheaper loan can reduce monthly payments and allow you a chance to save up for the negative equity payment.

How To Work Out Negative Equity On A Car

When your car finance agreement starts, your lender will set a guaranteed minimum future value (GMFV) that they believe represents the car's future value. If you want to work out whether you’re in negative equity, do the following:

Take the amount you still owe (Don’t forget to include the interest!) and compare it with the GMFV. If you owe more than your GMFV, you’re in negative equity. If you owe less than the GMFV, you’re in positive equity, and the surplus can be used as a deposit on a new car finance deal.

If you’re not sure what your cars GMFV is, get in touch with your lender.

How To Avoid Negative Equity

• Choose hire purchase car finance for quicker equity buildup. In a HP agreement, you’re paying off the entire car value plus interest in monthly instalments. If you compare this to PCP, which leaves a large sum until the end, HP ensures quicker ownership of the car.
• Research car depreciation rates before purchasing. Avoid cars that tend to depreciate quickly, and opt for those that hold their value well over time.
• Make a substantial down payment to start with more equity. Placing a larger deposit reduces the gap between what you owe and the car's value. This can help guard against the onset of negative equity.
• Evaluate the value of add-ons before including them in your deal. Adding extras to your car finance deal will increase the amount you have to pay, without increasing the value of your car. This can actually directly contribute to negative equity down the line.
• Match your borrowing amount and term with the car’s depreciation rate. Setting your payments so they roughly match the depreciation rate ensures you are on track to level out your equity towards the end of your agreement.
• Maintain your vehicle in good condition. Keeping your car in good condition can actually delay how much it depreciates. Every car is different, and a well-maintained vehicle won’t lose value as quickly as the same make and model with a different owner. Keep your car in good condition to maintain its value as much as possible, helping limit the potential for negative equity.
  

FAQs

What Is Negative Equity In Car Finance?

Negative equity in car finance is when the amount you still owe is worth more than the car itself.

How Can Negative Equity Happen?

Here are a few of the most common reasons for negative equity:

• Switching up your ride.
• Missed payments leading to a build-up in how much you owe.
• If you are unfortunate enough to have a car accident and your insurance doesn’t cover it. The value of the car falls significantly, and you end up in negative equity.

Can I Change My Car If I’m In Negative Equity?

Yes, you can change your car if you’re in negative equity. However, in most cases, you’ll need to settle any negative equity before moving forward. It’s important to make any potential future lender aware of negative equity before moving forward.

What Are My Options If I Can’t Afford To Settle My Negative Equity?

In some cases, you can refinance to a cheaper agreement or car or extend your loan period to give you more time to get your financial house in order. Be aware that extending your loan period or switching your agreement can still leave you financially short down the line, potentially putting you in a worse position than before.

Can Negative Equity Impact My Credit Score?

Negative equity doesn’t directly impact your credit score, but failing to make necessary repayments will leave a mark on your credit file.

How Can I Get Out Of Negative Equity?

Here are some of the immediate ways out of negative equity if you find yourself stuck.

• Stick with your current deal.
• Voluntary termination.
• Pay off the negative equity.
• Consider making extra payments each month.
• Part exchange your car for something cheaper.

How Can I Avoid Negative Equity In Future?

Avoid negative equity in future by:

• Choosing hire purchase car finance for quicker equity buildup.
• Researching car depreciation rates before purchasing.
• Making a substantial down payment to start with more equity.
• Evaluating the value of add-ons before including them in your deal.
• Matching your borrowing amount and term with the car’s depreciation rate.
• Maintaining your vehicle in good condition to avoid its value falling quickly.

Does GAP Insurance Cover Negative Equity?

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.

Does A Deposit Remove My Chances Of Having Negative Equity?

A deposit can help bring down how much you owe, which in turn can reduce the risk of negative equity piling up.

Why Is Negative Equity More Common In PCP?

The amount you still owe on PCP agreements at the end of your deal is usually higher than in a HP agreement, which makes negative equity more common. Balloon payments are common in PCP agreements, meaning that the final sum you owe can often end up worth more than the car itself.