Car finance: what is negative equity?

Find out what negative equity is, and what you can do about it

Christofer Lloyd
May 29, 2019

Car finance can be a great way to get a desirable motor for an affordable monthly payment. If you need to hand the car back early - or if it’s stolen or written off - you could end up in negative equity.

Negative equity is the situation where the outstanding debt on a car is greater than its current value. This is most likely towards the start or middle of a contract, where the car has lost a substantial chunk of value and your payments haven’t caught up yet.

If you need to hand your car back early - for instance, you’ve just had triplets two years into a four-year contract and need a larger car or your income’s fallen and you need a cheaper car - you’re likely to be in negative equity.

Check out the BuyaCar guide to equity to see how to use equity to your advantage.

Look at the table below and you’ll see how you start with a high amount of negative equity with PCP finance and steadily pay this off, often ending with equity, where the car is worth more than you owe.

    

Cash price

Value after 1 year

Value after 2 years

Value after 3 years

Optional final payment

£20,000

£15,000

£12,000

£10,000

£9,000

Total amount paid

Value car has lost

Equity

At one year

£3,667

£5,000

-£1,333

At two years

£7,333

£8,000

-£667

At three years

£11,000

£10,000

+£1,000

Negative equity: how Gap insurance covers additional costs

If your car has been written off or stolen in the middle of a three-year finance contract, you’re likely to have negative equity, as the insurance company will pay you back the current value of the car, which may be much less than the remaining finance balance.

This could leave you several thousand pounds out of pocket, as relatively new cars could easily have lost far more value than you’ve paid off so far. This is where “Gap insurance” comes in. This top up insurance policy comes in different forms, but effectively covers the negative equity - meaning that you’re covered for the full value of the car or remaining debt.

Read the BuyaCar guide to GAP insurance, to get your head around the different options available.

Voluntary Termination: allows you to hand a car back that may have negative equity

There is another way to hand back a car on PCP which potentially has negative equity without incurring additional charges - provided you’ve paid more than half of the total amount borrowed: voluntary termination.

This is a legal right that allows you to return the car once you’ve paid that amount. Beware though, that using this facility is frowned upon by lenders - and its purpose is to help people avoid financial hardship rather than helping drivers to change car early - and using voluntary termination multiple times could cause lenders to charge you higher interest rates in future.

Furthermore, you’re only likely to have paid off more than half of the balance towards the end of the contract and at this stage there is a much lower chance of having negative equity.

Negative equity finance: it is possible to roll negative equity into new finance deal

If your car has negative equity but you need to change it early, fear not. There are ways to roll the remaining debt into a finance deal on a new car. This will increase the overall amount you pay, but could still help you to cut your monthly payments.

Visit the BuyaCar guide to negative equity finance to see all your options.

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