Negative equity car finance

Need a new car but can't afford to settle your current finance deal? Negative equity finance could be the answer

BuyaCar team
Jul 24, 2019

Negative equity happens when the value of your car is less than the amount needed to pay off the finance on it. Example: if a car has a current value of £10,000 and the early settlement figure on the finance is £12,000, the negative equity value is £2,000.

Negative equity finance is typically used when car finance payments become unaffordable and you need to trade down, or when you suddenly need a vehicle with more space, seats or better fuel economy. It can also help if you're struggling to pay charges for damage or excess mileage at the end of a finance agreement. 

In these circumstances, negative equity finance can help: with one monthly payment you can pay for your new car, bundling in the additional fees from your previous car.


What is negative equity finance?

Negative equity finance allows you to pay for a new car, and to repay additional costs from a previous finance agreement, in one monthly payment. This can be used to reduce your monthly payments or to upgrade early to another car - as long as it's affordable.

If you're looking to reduce your costs, then the process will typically work as follows:

  • 1. Pick another less expensive model - new or used
  • 2. Take out finance on the new car, with lower monthly payments, and trade in your other vehicle
  • 3. You'll be charged a bit extra each month to cover the settlement fee owed for the previous car

As long as your new car is substantially cheaper than your previous one, then you should pay less overall than if you had continued with the initial agreement. It’s important to keep on top of your new monthly payments to avoid debts spiralling out of control, however.

Negative equity finance is not the only answer if you're struggling to make finance payments, so it's worth talking to your lender about other ways they can help. You can see some alternative options below.

If you're using negative equity finance to purchase a car that better suits your needs, then you may end up paying more than before. For example, if your city car is too small for you, then it may make sense to get a larger vehicle that could leave you with a higher monthly payment.

BuyaCar works with a panel of lenders that offer negative equity finance - as do other providers. You can call 0800 050 2333 or send us a message to discuss your options.


Negative equity finance: how the payments are calculated


Negative equity loans with PCP (Personal Contract Purchase) finance

Most negative equity finance is used to help pay the early settlement fees on PCP agreements, which offer low monthly payments and a range of options (including returning or buying the car) at the end of the contract.

Once you've found a replacement new or used car, you need to arrange negative equity finance. You'll then have your current car collected.

Your outstanding finance will then be settled and you'll then make one monthly payment to your new lender, which covers the finance for your new car, as well as any outstanding balance or fees owed from your previous arrangement.

Negative equity finance may also help at the end of PCP agreements, where you have the option of returning the car. If you have exceeded the mileage limit or damaged the vehicle, then you'll incur penalties. If these prove unaffordable, then you can use negative equity finance to pay these fees and to get another vehicle.


Negative equity loans with HP (Hire Purchase)

Negative equity is less of a problem for cars on hire purchase finance because the monthly payments are higher, which means that your debts are less likely to exceed the car's value. Furthermore, HP is set up for customers who want to own the car at the end of the contract, so those who opt for HP are less likely to hand the car back in the first place.

However, if you do find yourself in negative equity and needing to cancel your HP agreement, then you should be able to take out finance on a cheaper car, as part of a plan that will also allow you to spread the cost of the remaining balance and any fees on your previous vehicle.


Negative equity loans with car leasing (PCH - Personal Contract Hire)

Terminating a car lease early can be expensive, as the additional charges vary considerably. The cheapest option can sometimes be to continue with the lease - as you're normally committed to making all of the payments, even if you hand the car back - so it's even more important to check that negative equity finance is the right choice for you.

Where it does make sense to cover the early termination fees with negative equity finance, it is possible to get a new car on PCP or HP finance.

As with PCP, you can face excess mileage and damage charges at the end of a lease agreement. These can be covered by taking out negative equity finance on your next car.


Alternatives to negative equity finance


You may find that you can reduce your monthly payments by refinancing at a lower interest rate, or over a longer term. But you do need to take all charges into account: settlement fees are often incurred when you refinance.

Voluntary Termination

If you’ve already paid more than half of the total amount payable - this means the total of the car's initial price plus interest and any other charges - on the agreement then you can voluntarily terminate the finance agreement by handing the car back.

This right is set out in law and you should have nothing further to pay if you do this, but it will mean that you end up with nothing to show for your payments, even if you had been paying off Hire Purchase finance, which results in you owning your car once you've made all the payments.

Some financial experts also warn that lenders may make a note of voluntary terminations. While the law lets you use voluntary termination to avoid financial hardship, should you cut agreements short repeatedly, then it could mean some lenders refuse to approve you or offer you higher interest rates in the future. That's because voluntary terminations typically cause additional costs for the finance company.

Agreement with lender

If you're in financial difficulties, then lenders will sometimes offer a new payment plan that's more affordable to ensure that you are able to meet payments rather than defaulting. You'll need to talk to your lender about your particular circumstances to see what help may be available.


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