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What Is Negative Car Equity?
10 October 2022

What Is Negative Car Equity?

What is considered negative equity on a car? Being in negative equity means that the amount you still owe to the finance company is more than the current value of the car you bought. This can raise issues if you want to sell or trade-in your car.

An example would be if you bought a car for £20,000 and decided to finance it, but two years later, you decide you want to trade the car. You still owe £15,000 on it. When you get it valued, it’s only worth £10,000. This means you’ll still owe £5,000, and if you want to exchange your car, this balance will be added to the price of the new car you’re buying.

Why do people find themselves in negative equity?

When you buy a car, its value goes down as soon as you drive it off the lot. This is known as depreciation. Your car can lose value for several reasons. Because the value of a car varies depending on the make, and model, and how you treat your car and its overall condition when you come to sell it can affect its value.

If you buy a brand new car, they lose value quickly, usually within the first three years of ownership, so if you buy on a hire purchase agreement, you may find you’re in negative equity for the first few years. However, as you continue to make regular repayments, this should even out.

If you want to avoid this, opting for a used car could be a good idea to help you avoid negative equity, as they’ve already lost the majority of their value and will reduce in value more slowly during ownership.

What can you do if you find you’re in negative equity?

  • Continue making your repayments until you have paid off your car finance loan, and then sell or trade-in your car.
  • If you have paid off more than half of the amount owed on the car via PCP or HP, you can apply for voluntary termination, which allows you to return the car to the car finance company simply.
  • Put a larger deposit down on your new car to bring down the price of the new car you’re looking to buy.
  • Improve your credit profile - If you find yourself in negative equity and want to purchase a new car but can’t put a deposit down, this will increase the amount you need to borrow from the finance lender. For example, if you want to buy a £30,000 car but you’re £10,000 over in negative equity, you need to borrow £40,000. The finance lender will check your credit profile, they’re going to consider whether it is worth the risk to lend £40,000 for a car that is only worth £30,000.
  • Consider negative equity car finance. This involves taking a loan out on a cheaper vehicle and combining the cost of finance for this vehicle and the negative equity from your previous loan into one monthly repayment.