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How much your car is worth today can come as a surprise, especially if it's less than the amount you have left to pay. If this has happened to you, you're far from the only one: negative equity on car finance is something many drivers face, particularly in the first few years of an agreement.
Negative equity means you owe more on your car finance than the car is currently worth. Say your outstanding balance is £12,000 but the car's only worth £10,000 right now, that's £2,000 of negative equity. It's a common position early in an agreement, since a car's value tends to drop faster than the balance does.
Negative equity matters most when you want to change your car finance, swapping to a new car, for example, or switching lenders. You'll need to check whether the car's value covers what you still owe first.
If it doesn't, you can pay the difference yourself or roll it into your next agreement. Not every lender allows this, though, so it's worth asking before you commit.
You can get car finance with negative equity but it largely depends on how much you still owe, how much you want to borrow next, and whether the lender's comfortable with the overall picture.
Every application is looked at on its own merits. Some lenders will consider a new agreement if the repayments fit your budget, but others may decide the borrowing is too high. If you're not sure where you stand, checking your negative equity car finance options through Carplus is a safer bet than applying with several lenders one after another, because we first do a soft search on you. But it won't affect your credit score, unlike repeated hard searches.
Start by telling us about your current car, how much finance is left to pay, and the vehicle you'd like next. If you're in negative equity car finance, we'll compare your settlement figure with the car's value and see which lenders on our panel may be able to help.
If your application is accepted, you can buy from any reputable UK dealer or part exchange your current vehicle. We'll work with the lender and dealer to handle the finance settlement, paperwork, and the details needed to keep the process moving.
Once your negative equity car finance agreement has been approved and everything has been signed, you can arrange collection or delivery if it's available. Then all that's left is to collect the keys and get back on the road.
Negative equity happens when your car's value drops faster than your finance balance does and most cars lose value quickest in the first few years, often faster than people expect. Your finance balance doesn't always keep pace, which is how many drivers end up in negative equity without realising it.
A few things make it more likely:
Negative equity becomes a problem when it limits your flexibility, because the shortfall mostly bites if your circumstances change before the finance is paid off.
If your plans stay the same, you may hardly notice it. But if you need a different car or a different finance arrangement sooner than expected, the shortfall can narrow your options and push up the cost of your new car finance deal.
That doesn't mean changing cars isn't possible. It just means taking a little extra time to compare your options, so you can find an approach that works for your budget.
HP and PCP both let you spread the cost of a car over monthly payments. But they handle negative equity very differently. With HP you're repaying the full vehicle value, so a shortfall can show up if you exit the agreement early. With PCP your payments mostly cover depreciation, so the balloon payment (set by the car's Guaranteed Minimum Future Value (GMFV)) changes how negative equity plays out.
Hire Purchase (HP) has you repaying the full value of the vehicle over the term. Negative equity builds if you end the agreement, sell, or part-exchange the car before the balance has fallen enough to match its worth. And the finance company won't absorb that shortfall for you, so it's yours to cover before you move on.
PCP car finance has your monthly payments cover mostly depreciation and interest rather than the car's full value. The car's GMFV sets the balloon payment at the end. The lender's best guess at what the car will actually be worth, agreed upfront. So the figures can work out differently than they do on HP.
If you reach the end of a PCP agreement and return the car instead of buying or part-exchanging it, negative equity doesn't automatically leave you out of pocket. That's because the finance provider carries the residual value risk, not you. But you're still bound by the terms of the contract, including any charges for excess mileage or damage beyond fair wear and tear.
If you fall behind on payments, your lender will contact you first to talk through what's affordable and see if a new arrangement can get things back on track. Missed payments alone don't put your car at immediate risk.
It's only if missed payments carry on from there that repossession becomes something your lender might consider and even then, only as a last resort. Lenders have to follow Financial Conduct Authority (FCA) rules and the proper legal process before repossessing anything, which gives you time and options along the way rather than a surprise.
Your options depend on how much of a shortfall you have and whether you need to change your car now or can avoid car finance until later.
The amount of negative equity you can roll into a new agreement depends on your application and the lender's criteria, including the loan amount, your income, and whether the repayments are affordable.
It's also worth thinking about the bigger picture. Rolling negative equity into new finance means starting the next agreement already carrying debt from the last one. And that pushes up the total cost of borrowing over the life of the deal.
If you can, cover the outstanding balance yourself or wait until the gap is smaller before you commit to anything new.
Negative equity isn't always avoidable, but a few choices can put you in a stronger position from the start.
But if you're already carrying negative equity, it's worth some caution before entering a new finance agreement.
The exact criteria vary by lender, but in the context of negative equity car finance eligibility, most panels apply similar baseline requirements for an application:
To apply for car finance you need to:
Your requirements:
Car requirements:
These estimates are subject to credit checks and may change when you apply for finance. this is for example purposes only
Maximum borrowable amount
Rates from 9.9% APR: the exact rate you will be offered will be based on your circumstances, subject to status. Representative Hire purchase (HP) example: borrowing £7,000 over 5 years with a representative APR of 21.9%, the annual interest rate of 21.9% (Fixed) and a deposit of £0, the amount payable would be £185.33 per month, with a total cost of credit of £4,119.81 and a total amount payable of £11,119.81. We look to find the best rate from our panel of lenders and will offer you the best deal that you're eligible for. We receive a fixed fee commission per finance agreement, or we receive a commission based on a percentage of the total amount of finance taken. This will not affect the interest rate offered or the total amount repayable. Our service is free.
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No, negative equity doesn't affect your credit score directly, and it doesn't appear on your credit report either. What lenders actually look at is how you manage the agreement, not the equity position itself.
Yes, you can roll negative equity into a new car loan but only if a lender's willing to accept it.
If your current car is worth less than the amount needed to settle the finance, some lenders will let you add that shortfall to your new agreement. You'd essentially be borrowing for the replacement car and the old balance, combined. And that means a bigger loan and usually higher monthly payments and more interest paid overall.
Start by finding two figures: your settlement amount and your car's current value. You can request an up-to-date settlement figure from your finance provider, then compare it with a realistic trade-in offer or market valuation. If the settlement figure is higher than what the car is worth, you have negative equity.
Yes, you can sell a car with negative equity. But you'll usually need to clear the outstanding finance first.
Under most HP and PCP agreements, the finance company owns the car until the balance is settled. If the car's worth less than the settlement figure, you'll need to cover that shortfall before you become the legal owner and can complete the sale. Some people pay it from savings. Others part-exchange instead, depending on what suits their circumstances.
Sometimes, but it's not something to take for granted. Guaranteed Asset Protection (GAP) insurance pays out when your car is stolen or written off and your main insurer pays less than expected. Whether it also covers negative equity depends on the policy — its limits and its exclusions.
Rolled-over debt from an earlier finance agreement, for example, usually isn't covered.
Yes, in most cases. A larger deposit means you borrow less from day one, so there's less ground to make up before the car's value matches your outstanding balance. That makes negative equity less likely, especially in the first few years when most cars lose value fastest.
Yes, but it won't remove the shortfall. If you settle your finance agreement early, you'll normally need to pay the settlement figure. And If that figure's higher than the car's current value, you'll need to cover the difference yourself.
You may also have the right to request voluntary termination if your HP or PCP agreement is regulated and you've settled, or can settle, 50% of the total amount payable. On PCP, that figure includes the balloon payment, so you may not reach the halfway point until quite late in the agreement.
Yes, you can usually part-exchange a car with negative equity and it's a fairly common way to change vehicles. The dealer compares your car's trade-in value against the settlement figure.
If there's a shortfall, you'll usually have two options. You can pay the difference yourself, or, if a lender agrees, roll it into your next finance deal.
Not in the way many people think. A dealership can pay your settlement figure directly to the finance company as part of a part exchange. But that doesn't make the negative equity disappear.
If the settlement amount is higher than the car's value, you'll need to cover the shortfall yourself.
Usually not. Negative equity is simply the gap between what your car is worth and what you still owe. It only disappears once you pay off that gap.
You can do that by settling the finance, selling the car, or reaching the end of the agreement and handing the car back.
