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Negative equity car finance

If you want to buy a vehicle but your current car is in negative equity, you can still get a new finance deal. We explain all you need to know in our guide.

Zuto is a credit broker, not a lender. Our rates start from 10.6% APR. The rate you are offered will depend on your individual circumstances. Representative Example: Borrowing £8,000 over 60 months with a representative APR of 20.9% the amount payable would be £208 a month, with a total cost of credit of £4,486 and a total amount payable of £12,486.

What is negative equity car finance?

Find out what negative equity car finance is and the common reasons you might find yourself in it.

What does negative equity mean?

Negative equity essentially means your car is worth less than the money you owe. For example, if you owe £4,000 to your finance company, but the value of your car is now only £3,000, then you would have £1,000 of negative equity on your finance.

After a while, most contracts balance out, because the car's value decreases more slowly as you continue to pay off your loan at a consistent rate.

Why am I in negative equity?

Your car can go into negative equity for any number of reasons. For example, you might want to change cars during your loan period or you might be struggling with payments. Circumstances might even be out of your control, such as if you’ve had an accident and the insurance company only covers the car’s current value which is less than you owe.

Why is car negative equity a problem?

If your car is in negative equity, it can present you with several problems. The main one is that your financial flexibility with regards to your car can be restricted, especially if your personal circumstances have changed and you’re struggling to make payments. Because your loan balance exceeds the market value of the car, you’ll still owe the finance company money even if you sell or trade it in. Depending on your financial circumstances you might not be able to pay off the negative balance, and if you miss payments, you may be charged late fees.

Different kinds of car finance with negative equity

Your chances of going into negative equity vary, depending on the type of car finance you take out. We’ve explained how to approach this if you have either a hire purchase or PCP car loan arrangement.

Hire purchase and negative equity

Hire purchase finance involves paying a fixed monthly fee, and owning the car outright at the end of the term. Because you’re paying off the total value of the car more quickly than if you had an equivalent PCP agreement, it’s less common to fall into negative equity.

If you do get into negative equity, however, you can choose to cancel your current hire purchase agreement and take out a loan on a cheaper vehicle. It’ll need to be cheaper because your new loan will need to incorporate the negative equity amount from the previous loan.

Negative equity finance with PCP

Because a PCP arrangement typically includes an optional balloon fee at the end of the deal, monthly payments are often lower than you would pay for the same vehicle on a Hire Purchase loan.

As a result, it’s not uncommon for the amount you owe to 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.

What causes negative equity in car finance?

Various factors can cause car finance negative equity and affect your chances of moving to a new car from your existing one. Here are the main ones to look out for:

Car depreciation

The most likely factor to cause negative equity, car depreciation is when your car loses value over time. This is particularly acute in the early months of ownership - it’s said that your car loses a large chunk of its value the second you drive away from the showroom. The decline becomes more and more gradual as time goes on, so you’re less likely to be in negative equity the further you are into your finance term. 

High-interest rates or long-term car loans

If you took out your car finance with a high-interest rate, you’ll be contributing a larger percentage of your monthly repayments to the interest payments rather than the cars original value. Therefore you’ll be paying off your equity slower. Equally, if you took out a long-term car loan to reduce payments, you’ll be building up your equity in the car at a slower rate too, especially compared to the vehicle’s rate of depreciation. 

Insufficient down payment

The larger the deposit you pay, the more equity you’ll own in the car at the very beginning of your deal. Obviously, the reverse is true - a small deposit gives you a small amount of equity that may not keep up with the car’s initial depreciation. 

Rolling over negative equity

Some borrowers choose a short-term fix to overcome negative equity by rolling it over into a new car loan. However, this can also just move the problem down the road, worsening the situation you’ll face in the future when you come to refinance for another car.

Overpaying for a vehicle

If you pay more than the car is worth, then you’re immediately risking negative equity. Your finance deal will likely lead to you paying considerably more than your car could be sold on for. Zuto can help reduce the risk of this because we undertake a wide range of checks that make sure you’re buying your car at market value. 

Damage or modifications

You can further reduce the market value of your car by making aftermarket modifications or by sustaining damage (Category S - structural damage -  or N - non-structural damage). These can both lead to a situation where the car can’t be sold for enough to cover the finance you owe. 

Early trade-in

If you choose to trade your car in early in the finance agreement, there’s a chance that the value of the car may be lower than the outstanding loan balance. That’s because the largest depreciation in the car’s value happens right at the beginning.

Trading in a car with negative equity

Many of us looking for car finance are trading in our current car. It’s a smart way to make sure you always have the car you need, and gives you a great starting point for your new arrangement. But what if your current car finance is in negative equity?

If that’s your situation, Zuto may be able to help.

We’ll find the right lender

We’ll approach our panel of lenders to find those who can offer you negative equity car finance, with plans available for hire purchase (HP) and personal contract purchase (PCP).

A deal made for you

What you’ll be offered will partly depend on the kind of car credit you originally took out, and each lender will want to look at the specific terms of that loan before approving you for negative equity car finance.

We’re here to support you

Our team will help you get your head around the options. We’ll explain clearly what you can expect to pay each month for your new car, once you’ve moved your negative equity over to a new finance agreement. Search our car finance options now to find a suitable deal.

What else can I do?

If you choose not to transfer your negative equity to a new finance agreement, there are three other simple things you can do:

1. Stick with your deal

If you can still afford your monthly payments and don’t want to change your car, you can stick with your current deal. Just because you’re in negative equity, you don’t have to panic; a lot of the time, your equity will balance itself out by the end of your deal.

2. Ask for a voluntary termination

If you’re wondering how to get out of negative equity car finance, one way is to simply return your vehicle; if you’ve paid at least half of your total finance package, you might be able to hand the vehicle back. Speak to your finance company first, as there might be a fee or other terms such as the condition of the vehicle or mileage restrictions.

3. Pay off the negative equity

Negative equity only exists when you still have a balance to pay on your finance agreement. As soon as that balance is cleared and you own the vehicle, the situation is resolved. In this instance, you would be starting your next car finance with a blank page.

Can I avoid negative equity?

It isn’t always possible to avoid car negative equity. For example, a new car going on sale can quickly affect used car values. However, there are things you can do to reduce your risk.

  • Taking out hire purchase car finance can reduce the risk of going into negative equity, because you’ll be paying off the balance quicker than a PCP agreement.
  • Do your research before choosing your car. Specific makes and models might depreciate faster than you can pay it off.
  • Pay a deposit instead of paying the full cost on finance.
  • Review any add-ons to check their value for money.
  • Check the total amount you’re borrowing and the term against the likely rate of depreciation.
  • Keep the car in good condition.
  • Stay within your agreed annual mileage limit.

If you’re already in car negative equity, get in touch with our team and we’ll do our best to help you find a negative equity car finance plan that keeps you moving forward.

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