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 car finance is something many drivers face, particularly in the first few years of an agreement.
The good news is it doesn't automatically stop you from changing vehicles or finding a new car finance deal. There are still options worth exploring, and we’ll show you how it all works.
Negative equity means you owe more on your car finance than the car is currently worth. If your outstanding finance is £12,000 but your car's current market value is only £10,000, you have £2,000 of negative equity.
Negative equity mainly matters when you want to change your car finance. You'll need to check if your car is worth enough to pay off the outstanding balance. If it isn't, you'll need to pay the difference or include it in your next finance agreement if the lender allows it.
Yes, you may be able to get car finance if you have negative equity, as some lenders may offer this option. It depends on how much finance is left to pay, how much you need to borrow, and whether a lender is comfortable with the overall agreement.
Every application is looked at on its own merits. Some lenders may be happy to 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, check your options through Carplus instead of applying with several lenders one after another.
The finance you choose should work for your budget as well as your next car. Taking the first offer isn't always the best move, especially if it leads to a less desirable agreement.
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 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.
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.
Most cars lose value faster than people expect, especially during the first few years of ownership. At the same time, your finance balance doesn't always fall at the same pace, which is why many drivers find themselves in negative equity without realising it.
The chances are higher if you put down a small deposit or choose long loan terms. Driving more miles than expected or buying a car that doesn't hold its value particularly well can also make negative equity more likely. Changes in the used car market may reduce what your vehicle is worth, too.
The biggest downside of negative equity is that it gives you less flexibility.
If your plans stay the same, you may hardly notice it. But if life changes and you need a different car or a different finance arrangement sooner than expected, the shortfall can narrow the choices available to you and make the next step more expensive.
That doesn't mean changing cars isn't possible. It simply means taking a little extra time to compare your options so you can find an approach that works for your budget.
With HP car finance, you're repaying the full value of the vehicle over time. If you want to end the agreement early, sell the car, or part exchange it before the balance has reduced enough, you may find the car is worth less than the amount needed to settle the finance. In that case, you'll need to cover the shortfall before moving on.
With PCP car finance, your monthly payments tend to cover only the car's expected depreciation and interest rather than its full value. The balloon payment at the end is based on the car's Guaranteed Minimum Future Value. So, it's possible for the figures to work out differently than they would on HP.
If you reach the end of a PCP agreement and decide to return the car instead of buying or part exchanging it, negative equity doesn't automatically leave you out of pocket because the finance provider takes the residual value risk. You'll still need to meet the terms of the contract, though, including any charges for excess mileage or damage beyond fair wear and tear.
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.
If changing cars isn't essential, continue with your agreement. As you make each monthly repayment, the amount you owe falls, which should reduce negative equity over time. If your car also holds its value well, the gap may close sooner than you expect and leave you with a clean slate.
If you do need to switch and get another car on finance:
If you're unsure which route makes the most sense, work with a credit broker to compare different finance products and potentially avoid high interest rates.
The amount of negative equity you can roll into a new vehicle depends on your application and the lender's criteria. They also check 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 you start the next agreement already carrying debt from the last one, which increases the total cost of borrowing. If possible, cover the outstanding balance yourself or wait until the gap is smaller.
Avoiding negative equity isn't always possible, but a larger deposit gives you a better starting point. You borrow less, so it's easier for your finance balance to stay in line with the car's value. A shorter repayment term helps, too, as long as the higher monthly payments still fit your budget.
The car you choose also makes a difference. Some cars depreciate quickly, so look for a car that holds its value well before you buy. Stay within your agreed mileage and keep the vehicle in good condition to get the best value when you sell or part exchange it.
If you're already in negative equity, think twice before adding it to another finance agreement. If you can afford it, clear the shortfall before taking out another loan. You could end up borrowing less and having lower monthly payments.
The exact criteria vary, but you'll usually need to meet the following requirements:
| To apply for car finance you need to | Requirements | Car must meet the following criteria: |
|---|---|---|
| Provide your full name, date of birth, and nationality | Be aged 18-75 years old | Cost between £4,000 and £40,000 |
| Share your recent address history | Pay an initial deposit if the lender requires one | Have no more than 120,000 miles on the clock |
| Confirm your employment status | Receive a monthly income of at least £1,000 | Be no older than 14 years at the end of the finance agreement |
| Show your income and regular monthly outgoings |
Compare and find the best car finance deals quickly and easily even with bad or poor credit. When comparing deals, you can also factor in the part-exchange value of your current car to reduce the overall cost.
Getting a finance quote with Carplus won't affect your credit score, but a hard search will be completed before completion of the deal
No-deposit car finance options are also available. Check your eligibility today with a soft search and find out what you qualify for.
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No, negative equity car finance doesn't appear on your credit report or directly lower your credit score. What lenders do see is how you've managed your finance agreement. If you make your monthly payments on time, being in negative equity isn't a problem in itself. It only starts to affect your financial record if it leads to missed payments, arrears, or a default.
Yes, you may be able to roll the negative equity into a new finance agreement, but only if a lender is prepared to accept it. If your current car is worth less than the amount needed to settle the finance, some lenders may allow that shortfall to be added to your new finance agreement. Essentially, you're borrowing for the replacement car and the remaining balance on the old one. That also means a larger loan, so your monthly payments and the total interest paid may increase.
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, but you will usually need to clear the outstanding finance first. With most HP and PCP car finance agreements, the finance company owns the car until the agreement has been settled. If you want to sell the car while it’s worth less than the settlement figure, you'll need to cover the difference before becoming the legal owner and completing the sale. For some people, that means paying the shortfall from savings. Others may decide to part exchange instead, depending on what works best for their circumstances.
Sometimes, but it shouldn't be taken for granted. Guaranteed asset protection insurance only helps if your car is stolen or written off and your insurer pays less than expected. Whether it also covers negative equity depends on the policy, its limits, and any exclusions. For example, rolled-over debt from an earlier finance agreement is not likely to be covered.
In many cases, yes. If you put down a large deposit, the amount you borrow is less from day one, so there's less ground to make up before the car's value is the same as your outstanding balance. That makes negative equity car finance less likely, particularly in the first few years when most cars lose value the fastest.
Yes, although it doesn't remove the shortfall. If you choose to settle your finance agreement early, you'll normally need to pay the settlement figure. If that's higher than the car's current value, you'll need to make up 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 may still be able to part exchange your car with negative equity, and it is a fairly common way to change vehicles. The dealer will compare your car's trade-in value with the settlement figure. If there's a shortfall, you'll usually have two options: pay the difference yourself or, if a lender agrees, include it in your next negative equity finance deal.
Not in the way many people think. A dealership can pay the settlement figure directly to your 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, the shortfall still needs to be covered.
Usually not. Negative equity is simply the gap between what your car is worth and what you still owe, so it doesn't disappear unless that gap is paid off. That happens when you settle the finance, sell the car, or reach the end of the agreement and hand back the vehicle.
