Negative Equity Car Finance

Negative equity is when your car is worth less than the money you owe. For example, if you owe the finance company £5000 but the value of your car is now only £4000, then you would have £1000 of negative equity on your car finance.

Most car finance contracts balance out after a while because the car’s value decreases at a slow rate as you pay off your loan.

You can go into negative equity for a number of reasons. For example, you might want to change your car during your loan period, you might be struggling with payments or you might have had an accident and the insurance company only covers the car’s current value (which is less than what you owe).

Often the causes of negative equity are out of your control, but there are multiple solutions to get you back on track.

Don’t panic, there are a number of things that you can do when faced with negative equity:

• Sometimes doing nothing is the best option. If you’re still able to consistently pay off monthly repayments and are happy with the car you have, doing nothing is the best thing to do.
• You can sell or trade in your car and make up the difference between the sale price and outstanding finance out of your own pocket.
• You can apply for voluntary termination. This is only an option if you’ve paid at least half of the total finance amount and are prepared to give the vehicle back.
• You can apply for negative equity car finance by applying for a loan that can cover the cost of your outstanding balance and new car.

If you have negative equity, it doesn’t have to be the end of the road. You could still get car finance.

Negative equity car finance can help those who are looking to trade in their current car for a cheaper model and combines the cost of clearing the negative equity and the cost of a new car into monthly repayments.

The rate of depreciation on the car is the main factor that causes negative equity which is impossible to predict and the car market can be unpredictable, so there is no way to guarantee that you’ll never be in negative equity.

Putting a bigger deposit or down payment on the initial purchase of your car will lower your loan amount which hugely decreases the chance of being surprised by negative equity in future.

Depreciation in value tends to happen much quicker on brand new cars, so looking at used cars could be a viable option to avoid negative equity.