Car finance: Negative equity and why it’s a problem

Car finance advice
Car finance - the negative equity problem (The Car Expert)

One of the problems car buyers often get caught out by with regard to their car finance is negative equity, and it can get them into financial trouble. But what is it and why is it a problem?

In this article, we will look at the following:

  1. What is negative equity?
  2. Why is negative equity a problem?
  3. Why carrying over negative equity is a bad idea
  4. How to minimise your negative equity

What exactly is negative equity?

Equity is the difference between what you owe to the finance company for your car loan and what the car is actually worth. If you car is worth more than you owe the finance company, the difference between the two is your equity. It means that if you sell the car, you can pay off your finance and still have something left over. Yay!

If your car’s value is less than what you still owe on it, that difference is called negative equity. That means that if you sell the car, the money you get for it won’t be enough to pay off your finance and you will have to pay the difference from your savings. Not so good.

For example:
Current car finance settlement: £16,000
Current car value: £12,000
Negative equity: £4,000

This is caused by the car losing value faster than you are repaying the loan. It will always happen at the start of your agreement and that’s perfectly normal, but it becomes a problem if there is still a significant negative equity difference later in the agreement, at the time when you are thinking about selling or changing your car.

Discussing part-exchange prices at a car dealership

“So, your finance settlement is £16,000 but your car is only worth £12,000. Is that about what you were expecting?” “What does that mean?” “Don’t worry about it…” (ominous music plays in background)

Having significant negative equity is very likely if your finance agreement is a PCP (personal contract purchase), especially if you have a small deposit and/or are taking the finance agreement over a long period (4+ years). Given that this exact scenario applies to millions of car owners in the UK, it’s fair to say that there are a lot of people who could potentially be in serious trouble if their financial circumstances change.

Why is negative equity a problem?

If your financial situation changes (eg – you lose your job, divorce or hospital expenses, etc.), you may be in a position where you can’t afford to keep up your monthly car payments. If your car finance is in negative equity, then even if you sell the car you still haven’t got enough money to pay off the debt to the finance company.

The example shown earlier had £4,000 of negative equity. If you were selling that car, that means you would need to find £4,000 on top of what the buyer has paid you in order to clear the finance still owing on the vehicle. And the majority of car owners won’t have that £4,000 available to settle the debt.

If you default on your debt to the finance company, they will charge you late fees on top of the payments you already can’t pay. So your debt goes up, making your situation worse. When you still can’t pay, the finance company will call in a collections agency and that will take your problems to a new level. In addition, your default on the loan will hit your credit score, making it harder to borrow money in the future or try to manage your way out of the problem. It’s a downward spiral that can easily end up in bankruptcy.

If you have other finance problems, negative equity on your car finance could push you into bankruptcy

Does the thought of this keep you awake at night?

This scenario is very common in car finance. If you have a hire purchase, you will usually have negative equity until you are about two-thirds of the way through your agreement (depending on how much deposit you paid up-front).

If you have a PCP agreement, you may end up being in negative equity all the way through to the end of the agreement and have to rely on giving the car back to claim your GMFV (guaranteed minimum future value) to cover your negative equity.

Carrying your negative equity over simply increases your risk

If you want or need to end your agreement early and change your car, you will almost certainly have negative equity to deal with – particularly if you have a PCP.

What people are often inclined to do is add their negative equity debt onto their new finance agreement. Some finance companies will simply not allow this, and in the aftermath of the financial crash of 2008 there was a bit of a crackdown with finance companies refusing to allow buyers to transfer negative equity from their old car to their new one.

However, it seems that this practice is on the rise once again. Anecdotal evidence here at The Car Expert suggests that it is becoming increasingly common, and that more finance companies are now allowing it. This is concerning.

What usually happens in this scenario is that the salesperson at the dealership breaks the bad news that your part-exchange is worth less than you thought, and that it’s not enough to cover the balance still owing on your finance: “But you don’t have to worry! We can just carry that amount over onto your new finance agreement, and all that will happen is that you’ll pay a few pounds more per month to cover it. It’s easy.”

At this point, the salesman will sit back, offer his best reassuring smile and insist that’s it’s no problem whatsoever.

Except that’s not really true…

A car salesman is not your friend, no matter how much he is smiling

Believe it or not, this guy does not really have your best interests at heart…

Let’s go back to the example at the top of the page: You have £4,000 of negative equity in your current finance agreement, and you want to borrow an extra £4,000 on your new agreement to pay that off. What the dealer will almost always fail to mention is that you have already paid interest on that £4,000, and you are now going to pay more interest on the same money because you are borrowing extra to cover it. But that’s only a minor problem. The major issue is that you are paying an extra £4,000 over and above the price of your new car.

Let’s say your new car costs £30,000. Your new finance agreement will include interest and fees, so your total amount repayable on the finance would probably be about £34,000. That’s already a negative equity of £4,000 before you have even started.

That new car will depreciate just as quickly as your old one, but the extra £4,000 of debt that you have whacked on top of the price means you will have an even bigger negative equity situation this time around, because you have basically paid £38,000 for a £30,000 car. So if you run into any financial problems over the next three or four years, you have multiplied your problems.

Next page: How to avoid or minimise your negative equity

Stuart Masson
Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

49 Comments

  1. Tell them they can volentry terminate may help people to,

    Reply
    • Stuart Masson

      Hi Joe. Voluntary termination will help in some situations, but we’re not going to advise people to go into a contract with the intention of VTing at a later date. The whole point of VT is to protect consumers whose circumstances have changed beyond their control. It’s not something to be used as a plan to avoid your contractual obligations from the outset.

    • Hi. I got an Audi Q3. Coming to the end of the 3 years. Feeling quite sick, I feel that when I bought the car the salesman missed sold the pcp. I traded in my car and got £7000 plus I added extra and paid 780 for those. Returned back to audi yesterday hoping to up grade my car to be told I’m in negative equity and need £ 4000 to up grade my car. So I’m totally gutted. Not only have I been paying 275 monthly. I also trade my car in which I owed for 7000. To end up with a debt and no car. I believe the government to deal with this mins selling. People are being taken for fools and don’t realise it.

    • Stuart Masson

      If you are at the end of your PCP agreement, you should be able to give the car back without paying off the negative equity. Therefore you won’t have any debt to clear, unless there are charges for excess mileage, damage or incomplete service history.

      If you are not yet at the end of the agreement (even if it’s only a couple of months away), you don’t have the right to give it back and walk away, so you have to settle your negative equity or voluntarily terminate the agreement.

  2. Another common myth you get told by the salesman is that at the end of the PCP agreement you will have enough equity in the car to be a deposit for a new one.
    I’ve not seen any evidence of this. At the end of my last agreement (or a couple of months before it was due to finish) I have negative equity, and my wife is currently being asked to “upgrade” her car, and sure enough the current value is exactly the same as the finance left on the car.
    I used to be a big fan of PCP, but it’s beginning to feel as if I’ve been mis-sold something. Is this the next PCP scandal?!

    Reply
  3. I still have 15 months left on my current contract with passport from Peugeot. They offered to bring me out of negative equity in order for me to get a new car early. They didn’t mention anything about carrying negative equity over. Should I be cautious? The sales person made it seem like peugeot finance would just write off the difference if I went for a new car.

    Reply
    • Stuart Masson

      Hi Chris. The finance company won’t write off the difference; it will be accounted for somewhere. For more information, have a read of our article about the myth of the early upgrade.

  4. When you enter into a vtermination what is the exact time allowed for instance 2 years of a 4year agreement or after paying half of loan and if you have a balloon on the end does this make a difference

    Reply
    • Stuart Masson

      Hi Brian. The VT point is half of the total amount payable, not halfway through the term. If you have a balloon, then it includes half of the balloon payment as well (since you have borrowed that balloon amount, even if you don’t inted to pay it back). For more information, read our complete guide to voluntary terminations.

  5. If i am on a lease deal, does negative equity affect me if im keeping the car for the full term and handing it back? And if it doesn’t should a salesman really be scaring me with negative equity talk?

    Reply
    • Stuart Masson

      Hi Jodie. If you’re on a lease (such as PCH) rather than a PCP, then you are simply renting the car. Negative equity is entirely irrelevant and the salesman should know better (although they often don’t).

      All you need to worry about are your mileage, your servicing and your vehicle condition to make sure you are complying with your lease terms.

  6. Thanks Stuart, this is what i kinda of thought. Unfortunately my father has put down a £2,000 deposit as he was scared about the negative equity gap growing the longer he left it, he had no paperwork and now they wont refund the £2,000. Where do you think i should turn?

    Reply
  7. What are the chances of paying g a lower final payment to buy the car if negative equity exists? Will a big finance arm, eg BMW, negotiate a lower figure if they stand to loose more if the car is handed back.

    Asking for a friend.

    Reply
    • Stuart Masson

      Hi Tom. Generally no, the finance companies have not ben prepared to negotiate a lower settlement. From their point of view, they would back their ability to recover enough money from selling the car at auction and charging you for anything they can get away with.

  8. Thanks for that.
    I’m 14m from the end of a deal and the diesel price crash has created quite a hole. Faced with the idea that next year my Countryman SD will be worth 1.5-2k less than the gmfv. Think I want to keep the car but paying that much more than trade value will stick in the craw a bit.
    I wonder if the fact I have minor damage insurance might tip the balance a little my way.. just have to wait and see I guess.

    Reply
    • Stuart Masson

      In which case you give the car back to the finance company and buy a similar one for less money elsewhere.

  9. This site is good – I have a PCP – wish I had gone HP or got a cheaper normal car – I drive BMW Z4 M sport – dealer was great at selling me the first one then work changed my contracts so I went for a MINI – cheaper then silly me wanted a Z4 back and – Wham now have £8k negative on a 2014 model low miles. – Work are now reducing my hours and overtime – So I was looking at a cheaper car – but I can not get finance for the extra – I can for 16k car loan well I could but BMW Finance have sent my credit rating to fair when I was near top of good. Should I ask for a settlement figure and see if the dealer comes back to me and offers me a cheaper car and not at £560 per mth x 36 with balloon of £8k

    Reply
    • Stuart Masson

      Hi Rupert. If you have £8K of negative equity, your priority should probably be to reduce this as quickly as possible. Changing your car again will almost certainly result in more negative equity – if a finance company is prepared to accept it (which is unlikely).

  10. Good Morning. I bought a new Vauxhall Corsa in March on a no Deposit PCP deal. I am about to lose my driving licence and my job as a result of a recent seizure/stroke. My car has only covered 2500 miles, but obviously I won’t be able to drive or pay for the car, with no savings to speak of, what are my options? Anthony

    Reply
    • Stuart Masson

      Hi Anthony. There won’t be any provision to cancel the finance agreement on medical grounds, so you will need to look at your own health insurance situation to see if there is anything that could cover you. Basically, you need PPI cover.

  11. Thanks Stuart, I don’t think I have any cover, as I was always very healthy. Would I be best to sell the car to settle some of the finance, or surrender car and borrow enough to make up the half value to settle the pcp contract.

    Reply
    • Stuart Masson

      Hi Anthony. We can’t advise on which path would be better for you and your circumstances. You would need to speak to a financial advisor.

      If your car is on a PCP, you don’t have the legal right to sell it anyway. You would need to speak to the finance company and ask them how you can manage it. Some are happy to agree a sale (particularly if you are selling to a car dealer) if the buyer settles the finance in full and you pay any difference to the buyer, but others are not supportive of any attempts by you to sell the car.

  12. Thanks – Stuart – i’m keeping my car and will see what to do in 3 years – as you say can hand back or keep it – I love my Z4 Thanks again

    Reply
  13. I am about to chande my car the car has negitive of £6433.31 peter vardy wants to pay it off n give me new car @ 9800 but wot i dont get by my caculations they say my car is worth £3500 so do i deduct that from the £6433.31 if i do that leaves £2933.31 but when i look at the agreement i see they have added £3500 to new car agrement take about confused .com some things not right can you point me in right path please ASAP many thanks paul

    Reply
    • Stuart Masson

      Hi Paul. Adding negative equity to your new agreement is not a good idea. It will put you in a very vulnerable position if you hit any financial bumps in the road over the next few years, as you are paying £13,300ish (plus interest and fees on top of that) for a £9,800 car.

      We can’t comment on your specific details based on incomplete information (you’d need to go over the quote or contract line by line to understand exactly how they have come up with their numbers, and that’s not something we do), but you are perfectly entitled to ask them to run through it in detail with you until you are comfortable that you understand what it all means.

  14. Interesting to see that this is common. I bought a car from a vw dealer and the car gave me a bad back so I was desperate to get out of the car and the dealer offered to change it for a different model. I was only after that I realised that it cost me £4K extra which they financed with a different company. I paid £30k for the car 18 months ago and still owe £25k and they now value it at £19k!! Not sure what to do really with this as I will need to change it in the next 6 months

    Reply
    • Stuart Masson

      Hi Mike. Early on in the agreement it is perfectly normal to have significant negative equity in the agreement, as the car depreciates much faster than you are paying it off. The main problems come when you have a high APR (so you are paying a lot of interest on the money you have borrowed) and/or you are carrying negative equity across from a previous finance agreement.

      Over time, the rate of depreciation slows down so that the car is losing less money than you are paying off each month. The longer you go into the agreement, the closer you get to a balanced equity position.

  15. I have been looking at the difference between leasing and paperwork deals having been badly stung by depreciation in the past. I found that you could lease an Audi A4 for £100 cheaper a month and £4k cheaper deposit on the same car compared to PCP. On visiting the dealer I also found the salesperson unaware of the lease side of the business. On visiting other dealers under the same family firm just mentioning private lease to the salesperson resulted in a cold response and a polite redirection to the business manager. As most people will change their car at the end of the agreement and never own the car what is the point of PCP?

    Reply
    • Stuart Masson

      Hi John. Most sales execs don’t get a slice of commission if you finance the car through contract hire – the sale is usually handled by a separate division of the company and the salesperson gets no commission. That’s why any effort at customer service goes out the window as soon as you mention leasing…

      A lease may be a better solution for you than a PCP, but everyone’s circumstances are different. Leasing can offer the lowest monthly payments, but it is also very inflexible when it comes to any changes in your circumstances. If you want to alter your mileage or end the agreement earlier than the contract says, it can be very expensive. If you hit financial trouble, there are fewer options to try and manage your situation to avoid large losses.

      It’s a bit like buying airline tickets. There are cheap options that have no flexibility, no refunds no meals and no cabin luggage. Or you can pay a bit more for the exact same seat and have more options to change your flights, get a refund, take a suitcase or have a meal included. The cheaper option will work better for some people, while a more flexible option will suit other people better.

  16. Can someone advise on what the best thing to do, when your st the end of your pcp but still need a car.

    Reply
  17. If you go into negative equity say 2K and you can’t afford to pay that off straight away what are your rights in regards to that? This is for PCP.

    Reply
    • Stuart Masson

      Hi Francis. Do you mean at the end of the agreement or during the middle of the agreement?

  18. Omg after realising my car would be in negativity and then realising that I would have to find another 4500 deposit after initially putting down my car as a deposit. I have now been told by another dealer Nissan that I need to check that I have not gone over my miles. Excuse me! Yes he said when you got the car you would have had a set mileage. I don’t remember that?. Yes any PCP will have a set mileage. Oh! I remember the dealer asking me how many miles I did. About 12,000. Thinking nothing of it. Oh dear, what a fool I am. I contacted lenders and they informed me that 36000 is set and what I started with which was 4240. I have gone over my miles by 7500. At a cost of 6p a mile. Imagine my horror. Proper been scammed.

    Reply
  19. Hi. I’m so pleased I’ve found this site. We bought a Nissan Qashqai and got Friends and Family discount of approximately 3500. We were told by the salesperson we would always have equity in the car due to the large discount. Found out today we are £2000 in negative equity ~ we are in a 48 month PCP and have paid 31 months of it. Usually we change our car about this time but don’t know what to do. Do we carry on paying knowing the car is worth less and less or do we get out now? Have been told by the dealer the car won’t be worth anything like the balloon payment by the end of agreement. We also put cash in at start! Apparently there is an issue with too many of our types of car out there so they are losing money very quickly. Like one of the other comments have already said I feel we have been mis sold the PCP too. Help!

    Reply
    • Stuart Masson

      Hi Janine. Any salesperson who says that you will always have equity with a PCP is lying – presumably, he didn’t put this promise in writing?

      It’s perfectly normal to be in negative equity after 31 months of a 48-month PCP. The agreement is designed to balance out, with the possibility of some equity, after 48 months.

      Between now and the end of your agreement, the car should start to depreciate more slowly (new cars always depreciate fastest in the first year and gradually slow down over time), so your monthly payments should start to reduce the negative equity over the next 17 months. If you are still behind after 48 months, that’s not your problem as the finance company has guaranteed the value of the car against the balloon at 48 months.

      If you want to be changing your car every 31 months or so, you shouldn’t be taking out a 48-month PCP.

  20. Hi, pcp is not good, there will loads of people making complaints soon enough especially with people who took them out 3 years ago and coming to the end of their 3 years. I believe that many people were mis sold this pcp. Given wrong information and duped into believing they would not be in negative equity. There is no way out, either you return the car voluntary termination but you will have to have paid more that half of what the cars worth. If you have gone over your mileage, which you probably were not aware off. Like 12000 a year plus with what ever you started with . If nothing and you go over 36000, for every mile your over could be 6 pence or 8 pence. So you will have to pay that plus any damage of course. You could still owe the 1000 + and then walk away. Or start again with deposit and get a car.

    Reply
    • Stuart Masson

      That’s how a PCP works. You also have the obligation to read a contract that’s put in front of you before you sign it. If you sign it without reading it or without understanding what you are signing, you have to accept responsibility for anything that’s in that contract that you didn’t know about.

  21. Thanks for the advice – think we will just sit tight now and review the situation at the end of this year. Hopefully no negative equity by then! It seems we are better off than lots of people as the garage told us yesterday they are getting loads of people in negative equity and it’s causing huge problems! Is PCP the next PPI?!?

    Reply
    • I think so.

    • Stuart Masson

      We were talking about PPI lawyers moving into the car finance market two years ago

  22. Hello,
    I brought a car on finance about 15 months ago from Rowcliffes Vauxhall,
    The car seemed to have a funny noise when driving. I spoke to Vauxhall about it and after 8 weeks of going back every Monday for them to have a look I was so sick i asked for a refund.
    I was told I can’t as I’ve had the car over 6 weeks. After a week or so of arguing they agreed to give me a different car but I would have to pay another £500 deposit and my mouthly payments would go up, from £179 a mouth to £204.
    The new car I had was more expensive and i didn’t think much more of it. The guy who I was dealing with didn’t really explain much to me apart from the new car needed abit of work and he gave me a hand over date.
    I went in and signed some paperwork and drove away. A couple weeks later I was thinking about the deal I had and looked deep into my paperwork. I discovered that I didn’t receive a refund that in fact I had been given a £3500 added onto my finance agreement.
    I spoke to some friends etc to find out that there was nothing i could about it. I continued in the car for another 4 mouth until my parter feel pregnant and i had to think about getting a five door car. I waited for a little while then decided to have a look.
    I found a car at Eden Vauxhall that seemed to tick all the boxes. I decided to purchase the car with Also giving my old car in part exchange outright so I didn’t have finance to worry about with a baby, I called up my finance company to pay for my car. And they said I needed £10,999 to pay for my car. I thought this was extremely high but know that my finance had been rolled over from my first car. I decided to just pay for it anyway.
    I took the car away a week or so later then yet again I had funny nosies coming from the car and funny smells.

    When I was first sold the car the salesman told me that my car belonged to a company and was used to drive up and down the motaway and had full service history. What Was the main selling factor for the car otherwise I would of not brought the car.
    Weeks went by and was still waiting for my service history after 6 weeks by child was Born and I still had no service history so I called up and spoke to a lady who told me that the guy who had sold me my car was no longer working there (was only his second day when I brought the car) so i explained my situation and what I was after and she told me she would chase it up and get it sent to me.
    I was happy with that and waited, two weeks later I was still waiting for the phone call to say it was on its way. So I called up to speek again. This time I wasn’t happy and spoke with a sales manager who told me that he apologised for my experience and that my car was owned privately and wasn’t motaway Miles. I explained that I wasn’t happy with this as I would not have a car that was like that otherwise. He told me that there isn’t much he can do.
    He later decided he would set me up a meeting with the manager to see if there was a understanding we could come to. The manager was adamant that there was nothing he could do and saying it was my fault for buying the car. Evan tho he employed staff that was lying to sell cars. After neally 3 hours of our meeting he agreed to give me a car of equal value. Minus £495 for de appreciation. I took this deal and have my current car. That has been fine,
    So what I’m wondering is where do I stand with this, I feel really short changed

    Reply
    • Stuart Masson

      Hi Alex. Given that this all dates back more than a year and there has been considerable correspondence and discussion over that time, your best bet is to seek professional legal advice. A lawyer will be able to help you work through the necessary material to try and reach the best possible result. Obviously there will be costs associated with this, and you shouldn’t expect to get any of those costs back again, so you will have to decide whether you think it’s worth it.

  23. Have sent letter regarding by. But be said I have to agree the by pack. The information I have read states don’t sign any paper work. But ‘ve area saying unless I send this back the won’t except VT. What do I do.

    Reply
  24. Hi there,
    Just looking for a bit of advice please? My SEAT Ibiza PCP contract is due to come to an end soon and I am thinking of upgrading. This is my first PCP contract and unsure of the process. I have called my local Seat and they won’t give me advice over the phone and keep saying come in but I would like to be a little prepared and know what I’m looking at financially. So my car does have some scratches on it and I know it will be in negative equity. Would it be advisable to get this fixed before I hand it back? Or what is the process of upgrading a damaged car?
    Thanks for any advice and sorry if this sounds like a stupid question :-)

    Reply
  25. Hi. I have received voluntary termination letter from audi. Within this letter they are saying I have a shortfall to pay. Of 10.000 pounds. Not sure what this is but I paid over half my payments. What’s is this shortfall. Please advise. Another 5.000 and I could have bought the car are they still trying extort money I don’t have.

    Reply
    • Stuart Masson

      I’m quite sure Audi is not “trying to extort money” from you. However, given that you don’t appear to have read any of the voluntary termination advice provided on this website and don’t appear to have read your finance contract when you bought the car, it’s very likely that you have miscalculated your VT amount (which is written in your contract, something you would have found if you had bothered to actually read it).

      “Half my payments” is not the same thing as “half the total amount payable”, which is something we make clear in our guide to voluntary termination. I’m guessing Audi’s numbers are more likely to be accurate than yours.

What are your thoughts? Let us know below.

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