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

Understanding your financial risks will help you avoid big problems

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Avoiding or minimising negative equity

It’s almost impossible to completely avoid negative equity in car finance, as you are taking on a debt (plus interest and fees) against a depreciating asset. Even if you have an interest-free loan, the car will depreciate faster than you are repaying the loan to begin with. After a year or so, the rate of depreciation starts to slow down and your repayments start to ‘catch up’. But on a PCP, it is still possible that you will never completely catch up and will always be in negative equity until the end of the agreement.

There are ways you can minimise your negative equity position, and it usually means going against what the dealer wants you to do. These are:

  • Have a larger up-front payment (deposit). The more you are putting in now, the less you have to repay over the next 3-4 years. You will also pay less interest as you are borrowing less money. Dealers will usually try to get you to reduce your deposit and borrow more (“Why wouldn’t you? The rates are so low!”), but this is only because the more you borrow, the more commission they get paid. It’s not for your benefit.
  • Take a shorter term, such as a three-year PCP instead of a four-year (or longer) PCP. Your monthly payments will be higher, but that’s because you are paying off more of the car each month and closing down your negative equity sooner. So if you run into problems down the track, your negative equity problem will be smaller and hopefully more manageable.
  • Don’t be tempted to change your car because you’re bored with it. Settling your PCP ahead of schedule is almost guaranteed to result in you having to pay off negative equity.
  • Don’t underestimate your annual mileage. If you take a PCP at an annual mileage of 6,000 but you actually do 10,000 miles each year, you are creating a problem for yourself. Your payments will be lower, but you are devaluing the car faster because of the additional mileage. So if you need to sell the car, the car is worth less than it should be and you have a larger problem.
  • Make overpayments if you can. Most finance companies will let you make overpayments; either in the form of higher monthly payments than what you have committed to, or extra payments here and there when you have some spare money available. This reduces your debt (and the total amount of interest you will have to pay) and therefore your negative equity position.
  • Don’t pay for any extras you don’t want or need. Dealers will ALWAYS want you to take things like GAP insurance and service plans. Again, this is not because they are concerned about your best interests but because they get juicy commissions on all those extra bits. Meanwhile, your costs keep going up but you’re not necessarily getting any real benefits.
  • Most importantly, make sure you can comfortably afford whatever you’re spending – with plenty of money left over each month to cover other costs and deal with any problems. If you are up to your eyeballs in repayments and have nothing to spare, you are much more vulnerable to any unexpected financial hits that may come your way.

In most cases, this means reining in your ambitions a bit and making sure you’re not biting off more than you can chew. That might sound depressing now, but your future self will thank me for it.

This article was originally published in March 2017, and was last updated in March 2019.


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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive 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.

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    • 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.

    • 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.

  1. 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?!

  2. 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.

  3. 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

  4. 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?

    • 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.

  5. 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?

  6. 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.

    • 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.

  7. 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.

  8. 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

    • 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).

  9. 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

    • 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.

  10. 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.

    • 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.

  11. 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

  12. 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

    • 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.

  13. 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

    • 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.

  14. 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?

    • 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.

  15. 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.

  16. 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.

  17. 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!

    • 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.

  18. 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.

    • 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.

  19. 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?!?

  20. 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

    • 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.

  21. 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.

  22. 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 :-)

  23. 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.

    • 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.

  24. Reading half of these comments makes me realise how ignorant many people are, you go into a dealership and sign a deal over 3 or 4 years, PCP is designed so that you pay off the depreciation of the car and only at the end of the agreement is it likely to balance out, hence why you get a guaranteed future value. If you then want to change the deal you agreed, of course it’s going to cost you. If you tried to cancel your mortgage half way through and your house was worth less than the mortgage, do you not think the bank would still want the full mortgage amount agreed?

  25. Hi Stuart Masson, I have an Audi Q5 and I would like to downgrade so I can pay less, do you know any other company that will take my negative equity towards an approved used car, I already tried Skoda and SEAT and they wouldn’t do it. Cheers

    • Hi Ermanno. Most finance companies will not finance any negative equity, and it’s not really in your long-term interests for them to do so either – as much as it might seem like it at the moment. It’s basically making your next car very expensive, which increases the finance company’s risk.

  26. Hi Stuart, the first car i had on finance was an Astra at £5000, but only kept it for 18 months then changed it to a new Corsa at £8000, carrying over £1000 negative equity. I have had it a year now and still have almost £9000 to pay over the next 3 years of my PCP agreement, and the car’s trade in value is just over £6000. My financial situation is more difficult now than when i bought the car, so is there any way that i could downgrade to decrease my negative equity?

  27. Hi all. I bought used Audi Q5 on finance in 2016.
    The car engine blown because there is no oil dipstick and oil level sensor was showing max.
    I refinanced this car getting 2000 pounds for it.

    I got BMW for 8500 which cost me 6500 because got 2000 for Audi. I still had finance on Audi.
    So BMW costs me 12000 including Audi finance negative equity.
    New finance company gave us loun of 12000 for this car.
    This new car is not in very good condition after week driving it.
    Question is If I reject it, will I get 12000 back or just 8500.
    Dealer is ignoring me to fix the car.
    The value the finance company paid for it before interest rates was 12000

    • Hi Igors. If you are able to reject the BMW under the Consumer Rights Act, you would get the original price of the car back, which is £8,500. You will still have to deal with your negative equity from the Audi, as that won’t magically disappear.

  28. Hi Stuart, me and the wife took out a car on a PCP in Nov 2016, it’s in her name but we’re now getting divorced.

    Do you know how the car is classed in this situation? It’s an asset and a liability I guess.

    I’ve paid half of the payments so far (we’ve paid c.2500 each so far), and the debt is now around 9900 in total, but that includes the final fee of 3750 that clearly doesn’t have to be paid.

    So by my calculations the total owed is really 6150. I think.

    If she takes the car it’s got 2500 of my money tied up in it, but she’ll have the rest of the debt to contend with.

    I’m baffled as to how it works, if you can help I’d greatly appreciate it.


  29. Hi Stuart,
    my wife and i want to buy a BMW for £21,000, we have the money to buy it out right, but BMW are advising us the take a PCP finance which will give us a further £1500.00 off. and they advised we could pay off the finance after one month of the agreement. what concerns me would we be given an early redemption fee for paying it off like this negative equity issue?

    • Hi Phil. You can withdraw from the finance agreement within the first 14 days without incurring any fees. If you want until after a month, you will have to pay early settlement fees. The dealer probably didn’t explain this because it would mean they lose their finance commission…

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