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What is negative equity in car finance?

What is negative equity in car finance?

Car finance is a route to vehicle ownership that enables many to drive away in a safe, modern and reliable car or van that they love.

One of the biggest problems you could face with car finance is negative equity. With this in mind, it's important that you understand what it is, why it is a problem and how you can go about minimising your negative equity. 

So, first and foremost, what is negative equity?

Vehicle 'equity' is the term given to the difference between what you owe to the finance company and what your vehicle is actually worth, during or at the end of your finance agreement.

For example, if your car is valued at less than the remaining balance still owed on your finance agreement, this difference is known as negative equity. If your car has negative equity, when it comes to selling or part-exchanging it, you will need to pay the difference. 

Say you took out a PCP agreement to buy a car and after two years, you still owe   the finance company £8,000. This is your current value settlement. But, the actual current value of your car is only £6,000, so if you wanted to sell it, or put it towards your new finance agreement, you would have to cover the negative equity of £2,000.

Of course, not everyone will be faced with negative equity. In fact, some motorists find that at the end of their finance agreement, they actually have positive equity - usually just called equity. If this is the case, when you come to sell or part exchange your car, you will have money to play with. 

Why does this happen?

Negative equity happens when a vehicle depreciates in value more quickly than a customer repays the loan on it to the finance company. 

It's normal for a vehicle to depreciate in value over time, however if there is a significant difference when it comes to selling or part exchanging your car, it can prove to be problematic. 

Why is negative equity a problem?

Negative equity is mostly an issue for drivers that experience a change of circumstances during the course of their finance agreement; something that affects them financially.

Regardless of the circumstances, monthly vehicle loan payments will still need to be paid and, if the car is in negative equity, you won't be able to sell it. What's more, if you miss a payment, you may be charged late fees on top of the missed payments.

What can I do about negative equity on my car?

If you find yourself in a position where your car becomes unaffordable, negative equity car finance could be the answer.

But it's important to remember that this isn't a decision that you should take lightly due to the risks involved.

What is negative equity finance?

Negative equity finance allows you to pay for a new car or van, whilst still repaying your previous finance agreement. Payments on the two vehicle finance deals are combined and paid as one fixed monthly payment. This allows drivers to pick a less expensive car or van model or take out finance on a new car with lower monthly payments. 

As long as the new car or van you pick is substantially cheaper than your existing vehicle, it should bring your costs down overall.

However, you must also be aware that carrying your negative equity over can increase the risk of landing yourself in more financial difficulty. The outstanding money that is added onto your new agreement will still need to be paid with added interest and fees on top.

So, when it's time to sell or part exchanging your car again, you could find that you have negative equity again. 

Unsure about used car or used van finance? We can help

It can be tricky to know what the best option is when it comes to vehicle finance

At Carbase and Vanbase, we can offer impartial, honest advice on finance for used cars and used vans, so you can find a vehicle you love without breaking the bank. Find your nearest store today. 

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