What is negative equity on a car?

What is negative equity? 

Equity is the difference between your car's value and the amount left on your finance. It can be positive or negative: 

What causes negative equity?

The main cause is depreciation – the value your car loses over time. New cars lose value fastest. A car may lose 15-35% of its value in the first year. So, a £20,000 new car could be worth around £13,000–£17,000 after the first year, depending on the make, model and mileage.

Depreciation usually slows after that, and your payments keep reducing what you owe. That's why negative equity is most common early in an agreement.

Other things that can make negative equity more likely:

• A small deposit or no deposit - You start by borrowing close to the car's full price.
• A long agreement - Lower monthly payments mean it takes longer to clear what you owe.
• Old finance added to a new deal - You begin the new agreement already owing extra.
• High mileage or damage - Both can bring your car's value down faster.

How to check if you're in negative equity

You can find out fairly simply with these three steps:

1. Ask your lender for a settlement figure. This is the amount you'd need to pay to clear your finance today.
2. Find out what your car is worth using an online valuation tool or dealer quotes.
3. Compare the two. If the settlement figure is higher than the car's value, you're in negative equity.

What happens if you end up in negative equity?

Often, nothing changes. If you keep up with your repayments, you can carry on driving as normal. Negative equity only tends to matter if:

• You want to sell or change your car early – You may need to cover the shortfall depending on what type of finance agreement you have.
• Your car is written off or stolen - Your insurer usually pays what the car is worth, which may not clear your finance. Gap insurance can cover this difference.

Can you still get car finance with negative equity?

Yes, it's possible. Some lenders let you add what you still owe to a new agreement. Before you agree, keep in mind that:

• You'll borrow more, so your monthly payments or total cost may go up
• You could start your new deal in negative equity too
• Lenders will check your credit report and whether you can afford the repayments

Can you sell a car with negative equity?

Yes, but how you do it depends on your type of finance.

Type of finance	Who owns the car?	What you need to do
Hire purchase (HP) or personal contract purchase (PCP)	The lender, until your final payment	Pay the full settlement figure before or when you sell
Loan	You	Sell the car and continue to repay your loan (or pay it off entirely – but this could mean an early repayment charge)

 

If you have HP or PCP and you're in negative equity, the sale money won't cover your settlement figure, so you'll need to pay the difference yourself.

Can you part-exchange a car with negative equity?

Yes. The dealer values your car and puts that money towards clearing your finance. You then have two ways to cover the shortfall:

• Pay it yourself - You start your new deal without owing anything extra.
• Add it to your new finance – If your new lender allows it, this is easier upfront, but you'll borrow more and pay additional interest.

Is voluntary termination an option?

It can be, if you have HP or PCP. This can help if you're in negative equity, because once you've paid half, you don't have to pay the rest of what you owe.

The Consumer Credit Act 1974 gives you the right to hand the car back once half the total amount has been paid. This total includes interest and any fees. If you've paid less, you can top this up to cover the outstanding amount.

You may still need to pay for:

• Any missed payments
• Damage beyond fair wear and tear
• Going over your mileage limit, if your agreement includes this charge

Voluntary termination doesn't apply to loans. Ask your lender how it will show on your credit report before you make any decisions.

How to avoid negative equity on a car

You can't stop your car losing value, but you can lower the risk of owing more than it's worth:

• Put down a bigger deposit - You'll borrow less from the start.
• Choose a shorter agreement - Your monthly payments will be higher, but you'll pay off what you owe faster and pay less interest overall.
• Pick a car that holds its value – Some vehicles are better for this than others.
• Look after your car - Keep up with servicing and stay within any mileage limit you may have.
• Avoid adding old finance to a new deal - You'll keep your new borrowing lower.
• Think about gap insurance - It covers the shortfall if your car is written off or stolen.

Getting help with car finance worries

If negative equity is making it hard to keep up with your payments, talk to your lender as early as you can.

You can also get free, confidential advice from:

• Citizens Advice — 0800 240 4420
• MoneyHelper — 0800 011 3797
• National Debtline — 0808 808 4000
• StepChange — 0800 138 1111