You may have heard the term negative equity in relation to the property market, but it also applies to car finance. In a general sense, negative equity is about owing more to a creditor than your asset, such as your home or vehicle, is worth. Negative equity can make buying a new car more difficult. But that doesn’t mean it’s impossible! With us, we’ll do our best to help you find a new agreement even if your vehicle has negative equity.

What is Negative Equity?

With a vehicle, negative equity is where your car is worth less than the total amount of money you owe the lender. For instance, if your car is valued at £4,000, but you owe £5,000 to the finance company, you would have £1,000 of negative equity.

In many cases, having negative equity in a vehicle is through no fault of your own, like if you’ve been involved in an accident which significantly reduces the value of the car, even after repairs. Or perhaps you’re struggling with your loan repayments and haven't managed to pay off the balance due each month. The market value of your make and model of car shifting as newer models come out will undoubtedly have an impact too!

Overall, most contracts balance out over time - by the time your agreement comes to an end you may no longer be in negative equity. This is because the value of your vehicle should decrease more slowly than the rate at which you’re paying off the loan. 

Ways to Avoid Negative Equity

Unfortunately negative equity in a vehicle isn’t always avoidable. The price of a car can fluctuate depending on the market, so you may even find your car is in negative equity shortly after taking out the finance agreement! 

There are a few things you can do to reduce the risk of negative equity though. We’ve listed a couple of examples below:

  • Do some research and consider speaking to experts before choosing your vehicle - some makes and models typically depreciate faster than others
  • As you’re not paying off the depreciation with a hire purchase, but the cost of the car itself, a HP agreement comes with less risk of negative equity
  • Putting a down payment on your vehicle instead of opting for no deposit car finance should help prevent negative equity
  • Keep your car in good condition where possible, and don’t exceed your annual mileage limit
  • If your car has any modifications, try and determine whether they increase the value of the vehicle 

Even if you’ve already bought a car on finance, so are unable to avoid some of the points above, negative equity isn’t the end of the world. You may find that your car only falls into negative equity for a short period of time, before the market value increases or your repayments balance out the difference. 

How to Trade in a Car With Negative Equity

If you have negative equity on your car, many people choose to trade in their current vehicle. This should offer a fresh start on a new arrangement. Simply complete our short online application, and we’ll search our panel of lenders to find those who can offer negative equity car finance. 

These lenders will wish to know the specific terms of your original loan, as well as the type of car finance you took out. They can then make a decision on your negative equity car finance. And if you have any questions along the way, our team are here to help. We’ll clearly outline your options, and ensure you know what to expect from your new arrangement.

Other Options With Negative Equity

While negative equity can sound scary, you don’t need to trade in your car should it happen to you. There are other options you may wish to consider too. 

Wait and See

As mentioned above, most contracts balance themselves out over time. So by the end of your term, you may find yourself back on track, or even have positive equity. If you’re still able to afford the due repayments each month and aren’t interested in changing your car, you can simply continue with your current deal.

Speak With the Lender

If you’re at least half way through your contract, and have therefore paid off over half the total balance due, your lender may be able to provide you with a few options, such as a voluntary termination. There are often terms and conditions you’ll need to abide by, like the mileage and condition of the vehicle, so speak to your lender about this. A termination is essentially where you hand the car back and end your agreement completely. 

Pay Off the Negative Equity

This is one of the simplest options, but it’s not always possible or practical. But if you are able to settle the balance of your finance agreement, you’ll own the vehicle and have no negative equity on it. That way, if you’re looking to enter into another car finance agreement, you’d be starting off with a blank slate.