Negative equity
car finance

What is negative equity car finance?

Negative equity happens when your car is worth less than the amount you still owe on your finance agreement. If you wanted to sell or part-exchange the car, its value wouldn’t cover the remaining loan balance, leaving a shortfall.

For example, if your car is worth £3,000 but you still owe £4,000, you have £1,000 in negative equity. This can happen because cars lose value over time (depreciation), sometimes faster than you repay the finance.

Most car finance agreements, like Hire Purchase (HP) and Personal Contract Purchase (PCP), are designed so that payments gradually reduce what you owe. But things like long contract terms, high interest rates, or a small deposit can slow this down. If you're in this situation, some finance companies offer negative equity car finance, allowing you to roll the shortfall into a new agreement.

Can you get car finance with negative equity?

Yes, you can get car finance with negative equity, but it’s essential to understand how it works. Negative equity car finance allows you to transfer the shortfall from your current car loan into a new finance agreement, but this increases the total amount payable.

You’ll likely face higher monthly payments because the outstanding debt adds to the cost of your new car. The interest rate and loan term will also impact your payments, potentially extending the repayment period. If the new agreement has a high representative APR, you might pay more in interest over time.

You should always check the long-term financial impact before committing to a new negative equity car loan. Misjudging the costs could lead to ongoing repayment challenges and reduced flexibility if your circumstances change.

Carboom can help you find the right solution. As a trusted UK car finance broker, we work with multiple lenders to provide clear, tailored finance options.

Why is car negative equity a problem?

Negative equity makes it harder to manage your car finance. If you need to sell or trade in your vehicle, the sale price won’t cover your loan balance, leaving you to pay the difference.

Financial flexibility is reduced if your circumstances change. Struggling with monthly payments can make negative equity more difficult to manage, and missing payments may lead to late fees or harm your credit score.

Ending your finance agreement early can be costly. Some lenders allow you to roll the negative equity amount into a new finance deal, but this increases the total amount payable.

Why am I in negative equity?

You’re in negative equity if your car’s value is lower than the remaining loan balance on your finance agreement. This happens when depreciation outpaces repayments, leaving you owing more than the car is worth.

You might face negative equity if you choose a long loan period with low monthly payments. Stretching the payments over a longer term slows down how quickly you repay the loan. If the car’s market value drops faster than you pay off the balance, you could end up owing more than the car is worth. High interest rates or a small deposit at the start of the agreement can increase this risk.

You could also end up in negative equity after an accident. If your car is written off and the insurance value doesn’t cover the outstanding loan, you must pay the difference. Gap Insurance can help in these cases, but it isn’t always part of the finance agreement.

Your financial circumstances can also affect your equity position. If your income changes, or you need to sell or refinance the car early, you may struggle to cover the negative equity amount. This situation can make it harder to switch vehicles or secure a new finance deal.

Tracking your car’s value and reviewing your finance agreement regularly can help you manage or avoid negative equity. Understanding how monthly payments, interest rates, and loan terms impact your balance will give you more control over your car finance.

Different kinds of car finance with negative equity

Negative equity affects Hire Purchase (HP) and Personal Contract Purchase (PCP) differently due to their payment structures.

Both options allow you to settle negative equity by paying the difference, refinancing, or rolling it into a new finance agreement—though this increases the total amount payable.

Negative equity with PCP

Personal Contract Purchase (PCP) agreements often lead to negative equity because of how the payments are structured. You make lower monthly payments during the agreement, which leaves a large balloon payment at the end. If the car’s market value falls below the remaining loan balance, you’ll owe more than the car is worth.

You need to request a settlement figure if you want to settle the finance early. If this amount exceeds your car’s market value, you must cover the shortfall. Some lenders provide negative equity car finance, which allows you to roll the outstanding debt into a new car loan. However, this increases the total amount payable and may raise your monthly payments.

You must also make a decision at the end of the PCP term. You can pay the balloon fee to keep the car, return it, or part-exchange it. If you have negative equity, trading the car in won’t clear the debt entirely.

Exceeding the agreed mileage limit or returning the car with damage will also result in extra costs, making negative equity on PCP car finance harder to manage.

Negative equity with HP

Hire Purchase (HP) agreements can lead to negative equity if you choose a long loan period or put down a small deposit. You make monthly payments that gradually reduce the loan balance, but if the car’s value depreciates faster than the repayments, you may still owe more than the car is worth.

If you decide to settle early, you need to request a settlement figure from your lender. If the amount exceeds the car’s current market value, you must cover the shortfall. Some lenders offer negative equity finance, which lets you roll the negative equity amount into a new car loan, but this increases the total amount payable.

Monitoring your car’s value regularly and choosing a shorter loan term or a larger deposit can help reduce the risk of negative equity with an HP agreement.

Can I avoid negative equity on car finance?

Managing negative equity on car finance requires careful planning. There are several ways to reduce the impact and regain financial control:

1. Make extra payments – Increasing your monthly payments reduces the loan balance faster, lowering negative equity sooner.
2. Extend the loan term – Spreading payments over a longer period can lower costs, but increases the total amount payable due to added interest.
3. Refinance the loan – Some lenders allow you to include the negative equity amount in a new finance agreement, though this raises overall costs.
4. Trade in the car – If upgrading, the shortfall can be added to a new finance deal, increasing your debt but allowing you to switch vehicles.
5. Stay within mileage limits – Exceeding the mileage limit on PCP agreements lowers the car’s value and may increase end-of-term costs.