Negative equity finance

If you need to quickly cut your car loan payments, negative equity finance could be the answer

BuyaCar team
Jan 24, 2018

If you find yourself urgently having to save money or needing a different car, then you can cut short a finance agreement to get a vehicle that better suits your circumstances.

The payments may have become unaffordable, or you might need a vehicle with more space, seats or better fuel economy. Whatever the reason, you can normally return the car to your lender early.

The lender will usually sell the car to cover the cost of the outstanding finance, but if you owe more than the car is worth, then then you'll be charged a settlement fee to cover the difference - which can add up to thousands of pounds.

Some drivers also face large settlement fees at the end of certain finance agreements, if they have incurred charges for excess mileage and damage.

That's where negative equity finance can help: one monthly payment covers the cost of your new car, as well as the settlement fee.


Negative equity finance

If you're looking to downgrade to a cheaper car, then negative equity finance works like this:

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

As long as your new car is substantially cheaper than your previous one, then you should pay less 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.

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 buy a car that better suits your needs, then you may end up paying more than before. For example, if your supermini 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 a PCP (Personal Contract Purchase)

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

Once you've found a replacement new or used car, you need to arrange negative equity finance with a lender. You'll then have your current model 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 the settlement fee.

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 pay for these fees and get another vehicle with negative equity finance.


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 the period when your car is worth less than your debt is shorter.

But if you do find yourself in negative equity and needing to cancel your HP agreement, then you should be able to take out a finance on a cheaper car, as part of a plan that will also allow you to spread the cost of the 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 can vary considerably. This means that it's even more important to check that negative equity finance is the right choice for you.

But 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, but not another lease agreement. 

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 on the agreement, then you can voluntarily terminate the finance agreement by handing the car back.

This right is set out in law, but will mean that you end up with nothing to show for your payments, even if you had been paying off Hire Purchase finance, which usually results in you owning your car.

Some financial experts also warn that lenders may make a note of voluntary terminations. If you cut agreements short repeatedly, then it could mean that you’re offered higher interest rates in the future.

Agreement with lender

If you're in financial difficulties, then lenders will sometimes offer a new repayment plan that's more affordable. You'll need to talk to your lender about your particular circumstances to see what help may be available.


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