Negative equity

Find out more about what negative equity is, learn how to avoid it, and read our tips on dealing with it.

If you wish to sell your car before the end of your car finance agreement, you may discover that your car is in negative equity. It’s important to understand what the term negative equity means, how you can try to prevent it and what to do if you do find yourself with negative equity.

If you wish to sell your car before the end of your car finance agreement, you may discover that your car is in negative equity. It’s important to understand what the term negative equity means, how you can try to prevent it and what to do if you do find yourself with negative equity.

What is negative equity?

In car finance, the term 'equity' is often used to mean the difference between the current value of the vehicle and any outstanding finance left to pay. If the vehicle is worth more than the amount left to pay under its finance agreement, that is sometimes called positive equity, or just equity. You can then use that 'equity' towards the cost of the new vehicle. However, if you still have more to pay under the finance agreement than the car is then worth, that difference is described as 'negative equity'.

What is negative equity car finance?

Negative equity finance is a financial arrangement that allows you to pay for a new car alongside repaying the amount due from your previous agreement. The negative equity finance deal absorbs the original agreement to include any outstanding amount. The monies owed from both the new and previous cars are combined and paid as one fixed monthly payment. This allows drivers to pick a less expensive car 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 to your new agreement will still need to be paid with added interest and fees on top.

Negative equity finance is a financial arrangement that allows you to pay for a new car alongside repaying the amount due from your previous agreement. The negative equity finance deal absorbs the original agreement to include any outstanding amount. The monies owed from both the new and previous cars are combined and paid as one fixed monthly payment. This allows drivers to pick a less expensive car 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 to your new agreement will still need to be paid with added interest and fees on top.

Negative equity finance is a financial arrangement that allows you to pay for a new car alongside repaying the amount due from your previous agreement. The negative equity finance deal absorbs the original agreement to include any outstanding amount. The monies owed from both the new and previous cars are combined and paid as one fixed monthly payment. This allows drivers to pick a less expensive car 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 to your new agreement will still need to be paid with added interest and fees on top.

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Why does negative equity occur?

The specific reasons why negative equity occurs can vary; it could be that a car has depreciated faster than was originally expected, or that the car was never worth as much as the buyer thought it was when they bought it. For example, it may be worth less than the owner expected because:


  • They paid too much for the car in the first place

  • The car has been damaged

  • It’s an undesirable specification or colour


Most cars naturally depreciate or lose their value over time. Generally, newer cars tend to depreciate faster than older models but as they age the depreciation slows down. The first owner of the car will have paid 20% VAT on the car, but once a car is used, the next buyer doesn't pay VAT on the car at all. Factors that can impact a car’s value over time include:


  • The condition of the car

  • The age of the car

  • The mileage of the car

  • The economy

  • The strength of the used car market


In car finance, negative equity normally happens when a vehicle depreciates in value faster than a customer repays the finance on it to the finance company.

The specific reasons why negative equity occurs can vary; it could be that a car has depreciated faster than was originally expected, or that the car was never worth as much as the buyer thought it was when they bought it. For example, it may be worth less than the owner expected because:


  • They paid too much for the car in the first place

  • The car has been damaged

  • It’s an undesirable specification or colour


Most cars naturally depreciate or lose their value over time. Generally, newer cars tend to depreciate faster than older models but as they age the depreciation slows down. The first owner of the car will have paid 20% VAT on the car, but once a car is used, the next buyer doesn't pay VAT on the car at all. Factors that can impact a car’s value over time include:


  • The condition of the car

  • The age of the car

  • The mileage of the car

  • The economy

  • The strength of the used car market


In car finance, negative equity normally happens when a vehicle depreciates in value faster than a customer repays the finance on it to the finance company.

The specific reasons why negative equity occurs can vary; it could be that a car has depreciated faster than was originally expected, or that the car was never worth as much as the buyer thought it was when they bought it. For example, it may be worth less than the owner expected because:


  • They paid too much for the car in the first place

  • The car has been damaged

  • It’s an undesirable specification or colour


Most cars naturally depreciate or lose their value over time. Generally, newer cars tend to depreciate faster than older models but as they age the depreciation slows down. The first owner of the car will have paid 20% VAT on the car, but once a car is used, the next buyer doesn't pay VAT on the car at all. Factors that can impact a car’s value over time include:


  • The condition of the car

  • The age of the car

  • The mileage of the car

  • The economy

  • The strength of the used car market


In car finance, negative equity normally happens when a vehicle depreciates in value faster than a customer repays the finance on it to the finance company.

Your car is in negative equity, what does this mean for you?

Having negative equity can become a problem in a number of different scenarios:

1

1

If you have an accident, and the car is written off, insurance companies will normally only pay out the market value of the car at the time of your claim. This means you’d be left to make up the difference to your lender out of your own pocket.

2

If your circumstances change for whatever reason and you can no longer afford your monthly payments, normally you could sell your car and use that to pay off what you can on your car finance agreement if you have one. However, if you have negative equity, you may not be able to recover the amount of finance outstanding.

If your circumstances change for whatever reason and you can no longer afford your monthly payments, normally you could sell your car and use that to pay off what you can on your car finance agreement if you have one. However, if you have negative equity, you may not be able to recover the amount of finance outstanding.

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How different finance agreements impact the equity on your car

The impact of negative equity will vary according to the type of finance agreement you have. The table below explains the difference between negative equity with a personal contract purchase (PCP) agreement and a hire purchase (HP) agreement.

The impact of negative equity will vary according to the type of finance agreement you have. The table below explains the difference between negative equity with a personal contract purchase (PCP) agreement and a hire purchase (HP) agreement.

What can you do if you have negative equity?

Do nothing

Unless you really have to sell, you are much better sitting tight and riding the equity out. If you have a hire purchase agreement you can continue making your repayments until the end of your loan term or if it’s a PCP deal, you can simply hand the car back. Being in negative equity early on in a car finance deal is not unusual and it may well even itself out. Don’t panic if you see your car’s value drop as the equity only becomes an issue when you are looking to sell the car.

Pay the difference

Depending on the type of finance you have, you could potentially sell or trade-in your car and make up the difference yourself from your own pocket.

Apply for negative equity car finance

You could choose to trade your current car in for a cheaper model and take out negative equity finance to make the payments more affordable. A negative equity car finance arrangement will incorporate any outstanding payments owed from the previous finance agreement.

If you're an Oodle customer and have had a change in your financial circumstances, you can talk to us to see how we can help. Get in touch with us on Live Chat to speak to an advisor.