Negative equity means you owe more on your finance than the vehicle is worth. It’s common, especially in the early years of an agreement, and it only becomes a problem when you want to sell, part-exchange or end the agreement early. This guide explains how to check for it, why it happens and how to deal with it.
In short
You have negative equity when your settlement figure is higher than your vehicle’s value. To check, compare a settlement figure from your lender with a few valuations. Your options include carrying on with the agreement, overpaying, voluntary termination or, with PCP, handing the car back at the end. Rolling negative equity into a new deal makes your next agreement more expensive.
What is negative equity?
Equity is the difference between what your vehicle is worth and what you owe on it.
- Positive equity: it’s worth more than you owe. You could sell it, clear the finance and keep the difference.
- Negative equity: you owe more than it’s worth. Selling it wouldn’t raise enough to clear the finance.
How to find out if you have negative equity
- Get a settlement figure from your lender’s app, website or phone line. See how to get a settlement figure.
- Get valuations from several buying services or dealers. Use what you’d actually be paid, not the advertised retail price.
- Subtract the settlement figure from the valuation.
Worked example
Your settlement figure is £12,400. The best valuation is £10,900.
- Equity: £10,900 − £12,400 = −£1,500
- You’d need to find £1,500 to sell the car and clear the finance today.
Why negative equity happens
- Depreciation. Most vehicles lose value fastest in their first few years, often faster than you pay down the loan.
- A small or no deposit. You start owing almost the full price.
- A long term or a large final payment. You pay down the balance more slowly.
- High mileage or damage, which reduce the vehicle’s value.
- Rolled-over debt from a previous agreement.
Your options
- Keep going. Negative equity usually shrinks as you make payments. If you don’t need to change vehicle, carrying on may be the simplest option.
- Overpay. Partial early repayments reduce what you owe faster.
- Wait. Ending the agreement later, when the gap is smaller, may cost less.
- Voluntary termination. If you’ve paid half the total amount payable, you can return the vehicle and owe nothing more, apart from any damage charges. See voluntary termination.
- Hand it back (PCP only). At the end of a PCP, the guaranteed final payment protects you. If the car is worth less, hand it back.
- Settle and sell. Pay the difference yourself, then sell the vehicle.
GAP insurance covers the gap between an insurer’s payout and what you owe if the vehicle is written off or stolen. It doesn’t help if you simply want to sell.
Rolling negative equity into a new agreement: the risks
Some dealers will add your negative equity to your next finance deal. It makes the change easier now, but you pay interest on the old debt and start the new agreement in negative equity.
Worked example
You roll £2,000 of negative equity into a new agreement at an illustrative 10.9% APR over 48 months.
- It adds about £51.10 a month to your payments
- It adds about £2,453 to the total you repay
These figures are illustrations, not a quote.
If a dealer suggests rolling over negative equity, ask to see the amount clearly in the paperwork, and compare the total cost with waiting or using another option.
How to avoid negative equity
- Pay a larger deposit.
- Choose a shorter term.
- Pick a vehicle that holds its value well.
- Stay within your mileage allowance and look after the vehicle.
- Avoid rolling old debt into a new deal.
Negative equity FAQs
Will the lender write off negative equity?
No. If you settle, sell or part-exchange, the full settlement figure must be paid. The exceptions are voluntary termination, once you’ve paid half, and handing back a PCP car at the end.
Can I voluntarily terminate if I have negative equity?
Yes. Voluntary termination is based on how much you’ve paid, not what the vehicle is worth. Once you’ve paid half the total amount payable, you can return it.
Does GAP insurance cover negative equity?
Only if the vehicle is written off or stolen. It doesn’t cover negative equity when you sell or part-exchange.
Is negative equity normal?
Yes, especially in the first year or two of an agreement with a small deposit. It’s only a problem if you need to end the agreement early.
Does PCP protect me from negative equity?
At the end of the agreement, yes. The guaranteed final payment means you can hand the car back. Part-way through, you can still have negative equity if you want to settle early.