With more than 1.5 million cars bought via finance in 2023, finance plans can offer drivers an affordable solution to owning a car. However, taking out car finance doesn’t guarantee the value of your car over time. If your vehicle depreciates more quickly than expected, you need a bigger car or your financial circumstances change, could find yourself with negative equity.
Getting into negative equity doesn’t mean you won’t be able to sell your car on, though: some dealers will accept your vehicle and make up the negative equity payment on it.
Money4YourMotors cannot accept cars in negative equity, but if you are able to make up the difference in payment, we’ll buy your car. Use our online valuation tool to find out how much your car is worth.
What actually is negative equity?
If you come to sell your car before you’ve paid your finance agreement off, you could be left paying the difference between how much your vehicle sold for, against what you owe the financer. It isn’t unusual for your car’s value to depreciate - you’ll lose money on any vehicle as soon as you drive it away from the showroom.
If you put down a lower initial fee, with a longer payment plan in place, you might find that your vehicle is worth less when you come to sell or swap your vehicle. The amount of negative equity you’ll have left depends on the type of finance plan you have, the point at which you come to sell your car, and the original sale price of your vehicle.
In other words; if you borrow £7,000 to buy a new car, but that car goes down in value and is now worth £5,000, you will be liable to pay the £2,000 that is left on your financial plan if you choose to sell it on.
How are car finance payments calculated?
There are a few things you need to consider when you take out a finance plan;
- The price of the vehicle
- The interest rate applied
- The term of the plan
Combined with the type of car finance plan you choose, these factors will decide how much you will pay back per month. Because the value of your vehicle could increase or decrease during your loan period, your finance settlement could end up being higher than the price of your car. It’s your responsibility to make your monthly payments, no matter how long your loan period is.
Hire purchase
If you choose a hire purchase plan, you’ll make monthly payments until you own your vehicle outright. If you need to change the terms of your agreement while your plan is still ongoing, you also have the option to give your vehicle back to the lender, without a financial penalty, as long as you have paid more than 50% of the instalments.
PCP finance
Rather than working towards owning your vehicle at the end of your plan, PCP loans give you the option to ‘borrow’ a car. You’ll make monthly payments, with the option to give the vehicle back at the end of your term, swap it for another vehicle, or buy it outright with a final balloon fee. Because PCP monthly payments tend to be less than HP plans, you’re more likely to come into negative equity at the end of your term.
Are there any alternative to negative equity?
To avoid the risk of negative equity in the first place, you could consider putting a bigger initial deposit down, leaving you with smaller monthly payments, and less interest to pay over time.
Another option is to increase the amount you pay monthly. The higher cost per month means that you will pay off your loan faster, reducing the equity you could have lost over time. Check with your finance provider to see if this is an option for you.
If you find yourself in a difficult situation, the best thing to do is to talk to your lenders. Depending on the type of plan you have in place, you may be able to cancel your plan altogether, or offset your negative equity with more affordable monthly payments.
Can you get out of negative equity?
Whether you’ve swapped your vehicle for something bigger, or you need to cut back on your monthly outgoings, some dealers will accept vehicles in negative equity, without the need to make up the difference in your final payment.
However, the most common way of getting out of negative equity is to settle the extra credit, or restructure your monthly payment plan. Find out more about the best places to sell your car once your negative equity has been settled.
