Learn About Negative Equity Car Finance And How To Handle It

In this blog…

👉 What is Negative Equity?

👉 Why Do You End Up in Negative Equity?

👉 Why is Negative Equity a Concern?

👉 Types of Car Finance and Negative Equity

👉 Factors Leading to Negative Equity in Car Finance

👉 Handling Negative Equity

👉 How to Avoid Negative Equity

What Is Negative Equity?

You owe more money than your car is worth. This is negative equity. If you owe £4,000 to your finance company, but your car is now valued at only £3,000, you have £1,000 in negative equity.

Usually, car finance contracts balance out. This is because the car’s depreciation slows down as you continue making regular payments. Depreciation value is the rate at which something loses value.

How Do You End Up In Negative Equity?

Getting into negative equity can happen really easily. Here are some of the ways you can end up in negative equity:

1. Changing Cars: Changing your car might cause you to end up in negative equity.
2. Payment Struggles: If you are struggling to make your payments every month, you could end up in negative equity.
3. Accidents: Let's say you have an accident, and your insurance doesn't cover it. This could see you end up in negative equity.

Why Is Negative Equity A Concern?

Having negative equity can lead to lots of problems. This is even more likely if you struggle financially, especially in meeting payments. With your loan balance worth more than the actual car, trading it in won't cover you. This could lead to late fees if you miss payments.

Types Of Car Finance And Negative Equity

The chances of being in negative equity change depending on the type of car finance you choose. Here’s how it works for hire purchase (HP) and personal contract purchase (PCP) agreements:

Hire Purchase and Negative Equity:

With HP, you pay a fixed monthly fee and own the car outright at the end of the term. It’s less common to fall into negative equity with HP. This is because you’re paying off the car’s total value more quickly than with a PCP agreement. With it being quicker, there's less time for the value of the car to fall. However, suppose you do end up in negative equity. In that case, you can cancel your current HP agreement and take out a loan for a cheaper vehicle, incorporating the negative equity.

Negative Equity with PCP:

PCP typically offers lower monthly payments due to an optional balloon fee at the end of the deal. This often results in the amount owed exceeding the car’s value. If you have PCP car finance with negative equity, you do have some options.

• Return the car.
• Pay the balloon fee.
• Take out a loan for a new car.

Factors Leading To Negative Equity In Car Finance

Several factors can lead to car finance negative equity:

1. Car Depreciation: Cars lose value over time, especially in the early months of ownership. High depreciation rates can lead to negative equity.
2. High-Interest Rates or Long-Term Loans: High-interest rates or extended loan terms can result in slower equity build up compared to the car’s depreciation.
3. Insufficient Down Payment: A small initial deposit can result in insufficient equity to keep up with the car’s depreciation.
4. Rolling Over Negative Equity: Attempting to solve negative equity by rolling it over into a new car loan can worsen the situation in the long run.
5. Overpaying for a Vehicle: Paying more for a car than its market value can put you at risk of negative equity.
6. Damage or Modifications: Aftermarket modifications or sustaining damage can decrease your car’s market value.
7. Early Trade-In: Trading in a car early in your finance agreement can lead to a lower car value than the outstanding loan balance.

Handling Negative Equity

If you find yourself in a negative equity situation, you have several options:

1. Stick with Your Current Deal: Can't afford the car but don't want to change it? You can continue your agreement. Negative equity often balances out over time.
2. Voluntary Termination: If you’ve paid at least half of your total finance package, you may be able to return the vehicle. Check with your finance company for any associated fees or conditions.
3. Pay Off the Negative Equity: Clearing the balance on your finance agreement eliminates negative equity. This can give you a fresh start for your next car finance deal.

How To Avoid Negative Equity

While it’s not always avoidable, there are steps you can take to reduce the risk of negative equity:

1. Choose hire purchase car finance for quicker equity buildup.
2. Research car depreciation rates before purchasing.
3. Make a substantial down payment to start with more equity.
4. Evaluate the value of add-ons before including them in your deal.
5. Match your borrowing amount and term with the car’s depreciation rate.
6. Maintain your vehicle in good condition.
7. Stay within your agreed annual mileage limit.

Already dealing with negative car equity? We can help. Marsh Finance can help you explore negative equity car finance options that suit you. We offer hire purchase (HP) and personal contract purchase (PCP) plans. We’ll guide you through the process, making sure you get the best deal. Explore our car finance options today.

Negative equity in car finance is a common challenge. Still, it can be managed with the right approach and financial guidance. It doesn't matter if you need to address negative equity, or avoid it altogether. Make sure you understand the factors at play, as well as the options on the table. This is key to making informed decisions about your car finance.