Negative equity on car finance: what it means and your options

Negative equity sounds alarming but it is a common situation and it is manageable. It simply means you owe more on your car finance than the car is currently worth. This guide explains how it happens and the sensible options if you want to move on.

What negative equity means

When you sell a financed car, you compare two numbers: the settlement figure your finance company needs to close the agreement, and the value of the car. If the car is worth less than the settlement figure, the difference is negative equity.

For example, if your settlement figure is 9,000 pounds and the car is worth 7,500 pounds, you are 1,500 pounds in negative equity. That gap has to be covered before the finance can be cleared.

Why it happens

Negative equity is usually nobody's fault. It tends to come from a few normal causes.

• Cars lose value fastest in their early years, sometimes faster than the finance is paid down
• Long agreements mean you owe a lot for longer
• A high mileage or heavy year of use can pull the value down
• Little or no deposit at the start leaves more owing

None of these mean you did anything wrong. It is just how depreciation and finance timing interact.

How to check if you have it

Working out where you stand takes two quick steps.

• Ask your finance company for a current settlement figure
• Get an honest valuation of your car based on its real condition and mileage

Compare the two. If the value is higher, you are in positive equity and free to sell normally. If the settlement is higher, you are in negative equity by the difference.

Your options if you are in negative equity

Being in negative equity does not trap you. You have several routes.

• Keep the car and carry on paying, letting the gap close over time as you pay down the balance
• Pay the shortfall yourself to clear the finance and sell the car
• Roll the negative equity into a new finance agreement, though this adds to what you owe on the next car
• Wait a few months if the gap is narrow, since paying down the balance can move you into positive equity

Which option fits depends on the size of the gap and your budget. There is no single right answer.

Be careful with rolling it over

Rolling negative equity into your next agreement is offered often because it keeps a deal moving. It can work, but be clear about the cost. You are adding old debt to a new car, so you start the next agreement already owing more than the car is worth. Go in with your eyes open.

How selling works when you have negative equity

If you decide to sell, the process is similar to any financed car, with one difference: you cover the shortfall so the finance can be cleared in full.

• Get a firm offer for the car
• The buyer pays the settlement to your finance company
• You pay the remaining shortfall
• The agreement closes and ownership transfers

On CarSavvi you can list your car for free and let verified dealers bid, which helps you get the strongest offer and narrow any shortfall. The winning dealer helps settle your outstanding finance. CarSavvi is not a party to the sale and does not give financial advice, so if your finances are complicated it is worth speaking to a free service like Citizens Advice or MoneyHelper.

The calm takeaway

Negative equity is a number, not a crisis. Check where you stand, understand your options and choose the one that fits your budget. Often the first move is simply finding out what your car is really worth.

Enter your registration on CarSavvi to get a free valuation and see what verified dealers will pay.