If your car is on finance, its value and what you still owe move at different speeds. The gap between them decides whether you'll have money left over when you change cars, or a bill to cover first.
Positive equity in car finance means your car is worth more than your settlement figure, which is the amount needed to clear the finance today. That extra amount is yours to use, usually as a deposit on your next car.
Negative equity is the opposite. Your car is worth less than you owe, so selling it wouldn't cover the finance and you'd need to make up the difference. Many cars start a finance agreement in negative equity, especially with little or no deposit, because they lose value quickly in the first year while your payments chip away at the balance more slowly.
The equity in your car is its current value minus your settlement figure. If the answer is above zero, you're in positive equity.
Say your car would sell for £15,000. Your lender's settlement figure is £5,000. That leaves you with £10,000 of positive equity.
On a Personal Contract Purchase (PCP), your equity at the end of the agreement is the difference between the car's value and the optional final payment. That final payment (the 'balloon payment') is based on the Guaranteed Minimum Future Value (GMFV), which is the lender's estimate of what the car will be worth when the agreement ends.
If the car is worth more than the final payment, you're in positive equity. If it's worth less, the GMFV protects you, because you can hand the car back and owe nothing more on its value. That protection holds as long as you've stayed within your mileage limit and kept the car in fair condition.
Part-way through a PCP, the sum works the same way as any other agreement. You compare the car's value with your settlement figure, not with the final payment.
Equity on a PCP usually starts negative and improves as the agreement goes on. That's because the car loses value fastest early on, while your payments keep reducing what you owe.
Our example car has a cash price of £20,000, and its values are made up for the example, so don't read them as typical depreciation. The agreement runs for 3 years. Its optional final payment is £9,000.
| Point in the agreement | Car value | Paid so far | Still owed | Equity |
|---|---|---|---|---|
| After 1 year | £15,000 | £3,667 | £16,333 | –£1,333 |
| After 2 years | £12,000 | £7,333 | £12,667 | –£667 |
| End of agreement | £10,000 | £11,000 | £9,000 (final payment) | +£1,000 |
The example leaves out a deposit and interest, so real settlement figures, and early negative equity, would be higher.
PCP deals don't reliably end in positive equity, because it depends on how the GMFV was set and what's happened to used car prices since. Some lenders set it cautiously, while manufacturer-backed offers can set it higher to lower the monthly payments. So check your equity a few months before the agreement ends, not on the last day.
Positive equity gives you 3 main choices at the end of a PCP, and the right one depends on whether you want to keep the car.
You can make the same choices part-way through an agreement, using your settlement figure instead of the final payment.
With negative equity, you have 4 main options, and the cheapest depends on how close you are to the end of the agreement.
Early in an agreement, the voluntary termination top-up is usually far bigger than your shortfall. So it tends to pay off only once you've paid close to half, or if the car's value has dropped well below your settlement figure.
Your car's equity depends on how fast the car loses value compared with how fast you pay down the finance. High mileage and damage cut its value, while a bigger deposit or a shorter term cuts what you owe sooner. On a PCP, a higher final payment leaves less room for the car to beat the GMFV.
For most people, the best next step is to get a settlement figure and an independent valuation before any dealer quotes a part-exchange price.
In positive equity? Use it as your next deposit once the dealer's offer matches your valuation. In negative equity near the end of a PCP? Handing the car back is usually the cheapest way out.
Ready to look at your next car? At Carplus, you can check your eligibility first – it's a soft search, so there's no impact on your credit score.
