Negative Equity Car Finance Explained

We often hear the term negative equity, and the first thought when we hear it is that the conversation relates to property. Perhaps you’d be surprised to know that negative equity is also relevant to car finance and is more common than you had probably first thought.

When you purchase a new car on finance, you pay back the loan over a set period, but occasionally, circumstances mean you may need to upgrade your vehicle whilst still in the finance agreement for the car you currently drive. When this happens, you may seek a used car on finance to satisfy your needs, but what happens with the existing finance arrangement? And what if the car you owe money on is now worth less than the outstanding balance on your finance agreement? Let’s take a look.

What does it mean if you are in negative equity on your car?

Negative equity means that you owe your lender more than the car is currently worth. Let’s say you got a new car on finance for £20,000, but you need to upgrade your car to something larger, perhaps due to the arrival of a baby. You’ll need to return your current vehicle and purchase your family car but, if you still owe £17,000 on this original vehicle, and it is now only valued at £12,000, you have negative equity of £5,000. The lender will want that back.

Sometimes, these changes in circumstance can make keeping up with that original finance agreement difficult, or maybe even impossible. There is a solution though, and that is where negative equity car finance comes into play. How it works will depend on whether you have PCP or HP car finance.

What is negative equity car finance?

Negative equity car finance allows you to pay for a new car on a finance agreement as well as pay the finance back on the car you could no longer afford. It puts both into one monthly payment that, if you find a cheap enough vehicle, will see your monthly outgoings reduced and therefore make car finance more affordable.

Some people also opt for negative equity car finance if they find that the charges added to car finance agreements, such as excessive mileage or fair wear and tear, are likely to be too expensive to pay.

By having a new finance agreement drawn up you can put these fees, or the outstanding balance of the original finance, into an agreement that also contains the finance for the new car you have chosen.

How does negative equity car finance work?

If you are finding the costs for your current vehicle are causing you difficulty, or you need to upgrade but still owe money on the original vehicle, you’ll want to look at ways to reduce your outgoings.

Start by shopping for a cheaper car that matches your needs, then look at selling the car on finance you originally had.

Your finance on the cheaper, new car, will be less than the finance on the car you were driving. The outstanding negative equity from that original vehicle will then be added to your monthly payments, and as the agreement is starting over, your payments should be spread over a longer period and therefore cheaper per month than before. However, there are, as we said earlier, differences depending on what finance option you take.

Negative equity finance for PCP car finance

If you have been paying for your car via a PCP scheme and now need to change vehicles, negative equity finance can help. Opting to secure a negative equity loan would help you clear the early settlement fee your PCP deal would charge. Simply find your replacement vehicle, arrange the negative equity finance, and then have the car you no longer wish to use collected. The outstanding amount on the car will then be settled by your new lender meaning you owe them the money for your new car and the amount they paid your previous lender.

At the end of PCP arrangements, you always have the option to return the car you financed and can find yourself liable for charges related to mileage or damage. If these are unaffordable, you can use your negative equity loan to cover the cost of those fees and finance a new car.

Negative equity finance for HP car finance

People using a hire purchase scheme for car finance are less likely to find negative equity an issue. The monthly payments on HP car finance tend to be higher than on PCP schemes meaning the car is paid for quicker. Once you’ve finished the finance, the car is yours and when you sell it, the cash is yours. However, if a circumstance arises where you need to cancel the agreement to find a cheaper alternative, you can take out finance on a cheaper car as part of a plan that lets you spread the remaining balance of the original vehicle too.

How can you avoid negative equity on your car?

Negative equity on a car only comes into play when you need to change your financed vehicle. If you don’t need the change, you simply keep paying the agreement as normal. However, life can throw some circumstances into the mix that mean paying for your car could become difficult. There are ways you can avoid negative equity and save yourself having to pay an additional debt when you need a new car.

• Opting for HP rather than PCP and making higher monthly payments will help you pay off the loan faster and help you secure ownership of the car. You can then sell it and use those funds for your new purchase.
• Put down a larger deposit when setting up your finance agreement. This leaves less to pay and makes monthly payments lower.
• Shop around for deals with good rates and find cars that hold value. Some vehicles are quicker to depreciate than others.

How to get out of negative equity on your car finance

Owing more than the car is worth can be frustrating, especially as you feel that you are paying back more than you should. However, there are ways to get out of negative equity without having to take a negative equity loan.

You could start by keeping the current deal running. If it is affordable, maintain the deal and keep the car. Once you get to the end of the agreement, or close to the end, you’ll be in positive equity and can then sell the car using the funds to secure your new vehicle. Alternatively, if your situation has improved and you can clear the outstanding finance in one go, you can clear the car finance and then sell the car.

Finally, and not available to everyone, is the option of voluntary termination. If you have paid at least half of the finance on the car, you can approach the lender and request a voluntary termination. This means you can end the agreement and walk away. You will need to approach the lender in advance to discuss this option, you may also find that lenders are less reluctant to lend in the future if they see repeated use of such a scheme.

Car finance can be a minefield of complicated processes but at Euphoria, we keep things simple. Our methods of financing allow us to help keep everyone on the road. Affordably. Our approach means that securing car finance for poor credit rating is made simple, we treat each application individually, carefully assessing each case on circumstances how they are now, not how they were. This means that anybody can secure the car finance they need and affordably pay for their car avoiding the risk of falling into negative equity. Whether it be first car finance or even electric car finance, Euphoria helps. Contact our team today for a quick car finance quote.