Negative equity car finance explained

Concerned about negative equity with cars? Our guide has all the details.

Negative equity car finance happens when the amount you owe on your car loan is more than the car’s current value. While it’s more commonly linked to property, car finance with negative equity can happen under certain circumstances – such as long loan terms, low deposits, or rapid vehicle depreciation.

In this guide, we explain how negative equity car finance works, the situations where it might arise, and how to get out of negative equity car finance if you find yourself in that position.

What is negative equity car finance?

Negative equity on a car occurs when your car is worth less than the remaining balance on your car loan. For example, if you owe £5,000 on your finance agreement but your car is only worth £4,000, you have £1,000 of negative equity.

This can create challenges, particularly if you’re looking to trade in your current car and buy a new one. Understanding how negative equity affects your position as a buyer is important.

How does negative equity happen?

Negative equity on a car usually becomes an issue when you want to change cars. As long as you keep on making payments, it’s not a problem. But if personal circumstances change quickly and you need to switch cars, you may find the remaining loan exceeds the car’s value.

Some circumstances may be out of your control. For example, negative equity can occur if your car is written off and the insurance payout doesn’t cover the remaining loan – especially if the car has depreciated quickly.

Other common causes include early trade-ins, long finance terms with low deposits, or unexpected events such as accidents. Understanding these risks can help you make smarter car finance decisions.

How to get out of negative equity car finance

Getting out of negative equity in car finance can be challenging, but it’s not impossible. Here are a few ways to manage this:

• Stick with your current deal: If you can continue paying and don’t need a new car, sticking with your current deal can help you build positive equity, making it easier to trade in later.
• Pay off the negative equity: Paying off the full loans means that you’ll own the car outright. This gives you a clean slate for your next car or trade-in.
• Roll over the negative equity: If you can pay off the full loan, you may roll the negative equity into a new deal. Bear in mind, though, this means borrowing more than your new car’s value.
• Request voluntary termination: If you prefer to end your agreement early, you’ll need to have paid off at least half the loan. Contact your finance company to discuss your options.

How to avoid negative equity on a car

There are a few ways to avoid car finance with negative equity, including:

• Putting down a larger deposit: This will give you a head start when it comes to paying off your agreement.
• Making higher payments: If you can afford to pay more and want to own your car sooner, Hire Purchase (HP) or Personal Contract Purchase (PCP) could be good options. These allow you to pay off the finance more quickly.
• Choose a car that holds value: Select a car known for retaining its value. Some cars depreciate quickly, which significantly lowers your car’s worth over time.

Can I sell a car with negative equity?

If you need to sell a car before your finance contract is complete, there’s a chance it may be worth less than the amount you owe, resulting in negative equity. In this case, you’ll need to settle the outstanding finance before the car can be sold.

Bear in mind, though, that most car finance agreements involve the finance company owning the car until the loan is fully paid off. So, be sure to speak to the firm before entering into any discussions relating to the sale of the car.

Can I exit early with negative equity?

If you haven’t paid off 50% of the finance agreement and want to exit early, you may face negative equity – where the amount you owe is greater than the car’s value. In this case, you’ll need to cover the difference out of pocket.

It’s possible to consolidate the remaining balance into a new loan with a specialist negative equity finance provider, though be aware that interest rates for these loans are often high.

Negative equity and GAP insurance

If your car is stolen or written off for any reason, you may find that the market value paid out by the insurance company for the car is less than the amount still owing to the finance company – and it’s still your responsibility to pay the finance company what is owed.

If this happens, you will effectively be in negative equity, and there isn’t much you can do to mitigate this after it’s happened.

GAP (Guaranteed Asset Protection) insurance will make up any shortfall between what the insurance company pays out and what is owed to the finance company. Our guide on GAP insurance has more details.

Interested? Carwow is proud to partner with MotorEasy for GAP insurance. Simply enter your reg plate and a few details about your car and get an instant quote. And as a special offer for Carwow customers, MotorEasy is giving 15% off its GAP insurance.

Negative equity and Hire Purchase

This guide has focused on PCP contracts, as they are the most common form of car finance. However, another option is Hire Purchase (HP). With HP, instead of paying for the car’s depreciation, you’re essentially renting the car, with the monthly payments leading to full ownership at the end of the contract – no balloon payment needed.

If you need to exit a Hire Purchase agreement early, the 50% rule under the Consumer Credit Act applies. This means you can hand the car back without penalty once you’ve paid off at least 50% of the finance. However, if you’ve paid less than 50%, not only will you have to return the car, but you’ll also need to pay the remaining balance to settle the contract. While this may not be technically negative equity, it can feel similar.

Negative equity car finance FAQs

Can you get car finance with negative equity?

Negative equity doesn’t necessarily stop you from securing new car finance. By choosing a cheaper car, trading in your current car, and agreeing to cover the shortfall with your finance provider, you may be able to roll the negative equity into a new finance deal. This allows you to pay off both the remaining debt on your old car and the cost of your new one.

Use our PCP Car Finance Calculator to explore what’s affordable and review your options.

How do I sell a financed car with negative equity?

To sell a car with negative equity, you’ll need to settle the outstanding finance first. If the car’s value is less than what you owe, you must cover the shortfall yourself. Start by requesting a settlement figure from your finance provider. You can either pay the difference outright to sell the car or trade it in and roll the negative equity into a new finance deal – though this will increase your borrowing. Always consider the financial impact carefully and use a finance calculator to assess what’s affordable before making a decision.

Can I part exchange my car if in negative equity?

Yes, you can still part exchange your car with negative equity. Some lenders allow the negative equity to be rolled into a new finance agreement, but this increases the total loan amount and may result in higher monthly payments or interest. Be sure to assess your affordability before choosing to do this.

Car change? Carwow!

Looking for a new set of wheels? With Carwow you can sell your car quickly and for a fair price – as well as find great offers on your next one. Whether you’re looking to buy a car brand new, are after something used or you want to explore car leasing options, Carwow is your one stop shop for new car deals.

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