Understanding Negative Equity Car Finance
Negative equity car finance is a term that might sound daunting, but it's important to grasp if you're considering purchasing a vehicle through financing. Let's break down what negative equity in car finance means, whether you can obtain car finance with negative equity, and what your options are if you find yourself in this situation.
What is negative equity in finance?
Negative equity in finance, particularly in the context of car financing, occurs when the value of your vehicle is less than the outstanding balance on your car loan. Essentially, you owe more money on the loan than the car is currently worth.
Can you get car finance with negative equity?
Yes, it's possible to secure car finance even if you have negative equity. However, it's essential to understand the implications and how it may affect your financial situation in the long term. We’ll go into this in more detail throughout this guide.
How do you deal with negative equity on car finance?
There are several strategies to manage negative equity on car finance:
Make extra payments: If it’s possible for you, paying more than the required monthly instalment can help reduce the outstanding balance faster.
Extend the loan term: While this may lower monthly payments, it could result in paying more interest over time.
Refinance the loan: Refinancing a car involves negotiating new loan terms, which could potentially lower monthly payments or interest rates.
Trade in the car: Trading in (also known as part-exchanging) your current vehicle for a cheaper option can help reduce negative equity, although it may not eliminate it entirely.
What happens if you end up in negative equity?
If you end up in negative equity on a car loan, it means you owe more on the loan than the car is worth, which can limit your options. You may struggle to sell or part exchange the vehicle without having to pay the difference out of your own pocket, or rolling the negative equity into a new loan. Depending on your circumstances, this can lead to financial strain, and in the most extreme cases can lead to the car being repossessed by the lender – but only if you fall behind on payments.
But it’s not all bad. There are options for managing negative equity, whether through making extra payments, refinancing the loan, or negotiating with the lender, to avoid being trapped in a cycle of financial difficulty.
How can I avoid negative equity?
It’s not always possible to avoid negative equity, as changes in the market can often dictate and change used car prices dramatically. However, you can try these tips to minimise the risk of negative equity:
Make a sizable deposit or down payment: Putting down a substantial deposit reduces the likelihood of negative equity as there is less of the car’s value to pay over the rest of the term. Make sure you seek advice on this before you do it, as larger deposits can put you at a disadvantage on some types of car finance agreements.
Choose a shorter loan term: Opting for a shorter repayment period decreases the chance of owing more than the car's value, though it will usually mean higher monthly payment amounts.
Research the vehicle's depreciation rate: Some cars depreciate faster than others, so choose a model with a slower depreciation rate if possible.
Can I change my car with negative equity?
Yes, you can change your car even if you have negative equity, but it's important to understand the financial implications before you do this. You may need to roll the negative equity amount into the new loan, or you may need to pay it off separately first, this all depends on your lender so check with them what your options are.
Can I part exchange my car with negative equity?
Yes, you can part exchange your car if you have negative equity on it. Many people choose to do this to help absorb the amount left to pay on the old vehicle and spread the cost of the negative equity amount by rolling it into the loan amount for a newer car. However, sometimes the negative equity amount may need to be paid off separately, depending on the dealer's policies.
Can you transfer negative equity into a new car?
Yes, some dealerships may allow you to transfer negative equity into a new car loan, which will mean you won’t have to pay the balance in one big chunk, but spread it over several payments. However, this could potentially increase your overall debt and monthly payments, so make sure you check the financial implications before you make any decisions.
I have negative equity on my current car. Can I use the loan to clear the debt?
Yes, this is technically possible, and it can alleviate the immediate burden of the negative equity by spreading the payments over a longer period. However it's important to understand the wider implications of using a new loan to clear your negative equity debt. Doing this effectively extends your debt, so it’s important to look ahead and decide whether this could lead to further financial strain for you in the long run. Additionally, rolling negative equity into a new loan could result in higher monthly payments or a longer repayment term, ultimately costing you more in interest over time.
How much negative equity can you finance?
The amount of negative equity you can finance depends on various factors, including the lender's policies, your creditworthiness, and the value of the new vehicle you're purchasing. It will vary across different dealerships and lenders, so it’s best to ask them how much they would be willing to let you finance. Here at CarFinance247 we work with a panel of lenders who specialise in negative equity car finance, so we may be able to help you get a finance agreement that works for you.
How do I get rid of negative equity on my car?
To eliminate negative equity on your car, you could consider making extra payments towards the loan (if this is manageable for you in your budget), as this will reduce the amount owed faster. You could also try refinancing the loan to get better terms and lower interest rates, which will help you clear the negative equity faster. Or you could try selling the car privately to cover the outstanding balance, as you can often get more money selling privately than you would by selling to a dealership.
How much is negative equity on a car?
The amount of negative equity on a car depends on factors such as the initial loan amount, the vehicle's depreciation rate, and any additional fees or interest accrued. It could be as little as a couple of hundred pounds, or it could be thousands; it all depends on the car itself and the state of the used car market at any given time.
What is a negative debt-to-equity ratio on a car loan?
A negative debt-to-equity ratio on a car loan is when the amount left still to pay on the vehicle finance agreement is higher than its current market value. This is essentially another way you might hear ‘negative equity’ described.
Is 0.5 a good debt-to-equity ratio?
A debt-to-equity ratio of 0.5 indicates that there is half as much equity as debt in the vehicle. While it's not necessarily "good" or "bad," it's essential to consider other factors such as market conditions and personal financial goals.
What happens when the debt-to-equity ratio is negative?
A negative debt-to-equity ratio indicates that there is more debt than equity in the vehicle, which means you owe more on the loan than the car is worth. This can make it challenging to sell or trade in the vehicle without having to pay additional costs.
Will gap insurance cover negative equity?
Gap insurance may cover negative equity in certain situations, such as if your car is written off or stolen and the insurance payout is less than the outstanding loan balance. However, coverage varies depending on the policy terms and conditions, so this isn’t always guaranteed.
How do you fix negative equity?
If your car has negative equity, there is no way to reverse this issue. However, as we have already explored earlier in the article, you can fix negative equity in the sense that you can use certain strategies to manage and reduce the outstanding finance amount faster or in a way that is more manageable for your personal financial situation. You could consider making extra payments towards the total remaining balance of the loan, refinancing the loan for better terms, or selling the car privately to cover the outstanding balance.
Can negative equity be good?
Negative equity is generally not considered good because it means you owe more on the car loan than the vehicle is worth. However, in some cases, such as when purchasing a new car, negative equity may be unavoidable.
Will putting down a larger deposit reduce my chances of negative equity?
Putting down a larger deposit can reduce the likelihood of negative equity by lowering the initial loan amount and decreasing the gap between the vehicle's value and the loan balance. However, it's essential to consider other factors such as depreciation and loan terms. Putting down a larger deposit on a PCP car finance agreement can sometimes be less cost-effective because of the risk of depreciation in the car’s value, so it’s best to seek advice before you decide to put down a large deposit.
In conclusion, negative equity car finance is a complex topic that requires careful consideration and understanding of your financial situation. By exploring your options and making informed decisions, you can effectively manage negative equity and make the most of your car financing experience. Always seek professional advice from lenders, dealerships or financial experts if you’re not sure how to go ahead in dealing with negative equity car finance.