Car Finance if you have negative equity

What is negative equity in car finance?

For car owners, negative equity can cause issues when it comes to selling a financed car. Being in negative car equity means that the amount owed to the financing company exceeds the current value of the car.

When none or few of your monthly repayments have been made, the value of the car is likely to be less than the amount owed.

What this means is that for a motorist buying a car on finance, the car’s value dipping below the balance of the loan would not be all that unusual. The good news is that after a while, most contracts balance out as the car's value decreases more slowly as you continue to pay off your loan at a consistent rate.

What are your choices if you end up in negative equity with your car finance?

You could choose to trade your current car in for a cheaper model and take out negative equity finance to make affording the outstanding loan and new payments more affordable.
You could also apply for a voluntary termination - this is only an option if at least half of your agreement has been paid.
You could opt to do nothing and simply keep making your repayments
You could also choose to sell or trade in your car and then make up the difference out of your own pocket.

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Different kinds of car finance with negative equity

Hire purchase and negative equity

With a Hire purchase agreement you pay a fixed monthly repayment and at the end of the contract, you will own the car outright. As you will pay off the full value of the vehicle quicker that if you had a PCP deal, its less common to fall into negative equity.

If you do find yourself in negative equity you can choose to cancel your current hire purchase agreement and take out a loan on a cheaper vehicle. You will have to opt for a cheaper vehicle as your new loan will as need to incorporate the negative equity amount from the previous loan.

Negative equity finance with PCP

As a personal contract plan agreement usually includes an optional balloon payment at the end of the deal, monthly payments are often lower than a Hire Purchase loan.

Because of this it’s more common that the amount you owe can exceed the value of the car. If you have PCP car finance with negative equity, you can either return your vehicle, pay the balloon fee, or take out a new loan for a replacement car.

Selling a financed car with Negative Equity

When it comes to selling a car on finance or you want to part-exchange that car, you will need to pay back the entire loan balance in order to be able to make a sale. However, the issue is that if the car is now worth less than the loan balance, you would then need to make up the difference.

Negative equity can also cause problems if a vehicle is stolen or is written off as a result of a car accident, as often insurance companies are only able to pay out the market value of a vehicle at the time the claim is made.

Again, if the loan amount at this time is higher than the value of the car, then you would have to make up the remaining amount.

Can you start a new car finance agreement when you have negative equity?

If you are in a position where you want to start a new car financing agreement, either because you can’t afford to keep paying for your current vehicle or because you want to upgrade, but are in negative equity, this can be an issue.

The first step to take is to get in touch with your finance provider and discuss the situation with them. You may be able to work out a solution where they are willing to restructure your loan - potentially offering a longer repayment period. This is possible whether you’re in negative equity or not.

There are also a number of specialist companies that provide car finance agreements for motorists who are currently facing negative equity. You may be able to trade in your current vehicle and switch to a different option.

These specialist agreements for motorists who are in negative equity, tend to incorporate the costs of clearing the negative equity amounts along with the price of the new vehicle, and offer a single monthly repayment plan set over a fixed period of time.