Negative equity and outstanding finance: Your options
So, you want to change your car, but you still have payments to make on your current agreement. What can you do? Do you still have to wait until all your payments have been paid? Well, no you don’t. If you settle your loan early you may be entitled to a rebate of interest, so your settlement figure may be less than the sum of the remaining payments.
We can settle any outstanding balance on your current finance agreement and then use any remaining credit from your part exchange as deposit for your new car. But what if you owe more on finance than your car is worth?
What is negative equity?
Negative equity is when you owe more on your current finance agreement than your car is worth. As an example, you may have a car that is worth £4,000 but your settlement figure is £6,000, so you have £2,000 negative equity.
How do you get into negative equity?
All cars decrease in value, known as depreciation, and sometimes this can occur faster than you’re repaying your finance agreement. This can happen during the first few months of ownership of your new car, especially if you’ve borrowed a large percentage of the cash price of your car, paid a high interest rate, or carried negative equity in to your finance agreement from a previous agreement.
Why is negative equity a problem?
As long as you can afford the repayments then you shouldn’t worry about negative equity. If your loan was specifically for the purchase of your car then payments will either be structured to pay off your debt over the course of the loan, or, if they have a balloon payment at the end, should be set less than the guaranteed minimum future value.
However, if you find that you need to change your car whilst you still have negative equity then there are still options available to you.
What are your options?
Negative equity can be resolved. Here are the main options available to you:
Settle the loan
Settling the loan is the most common option. There are two ways to do this. If you have the cash available to pay the difference you can either partially settle your agreement (and pay off the negative equity) or add it to the value from the sale of the car to settle the loan in full.
If you choose to settle in full then your finance company will provide you with a settlement quote; this can often be less than the sum of the payments remaining.
You can keep the car and continue to make repayments until the point when you have no more negative equity. Or, subject to status, you could continue to pay your current loan and organise a new loan for your new car.
However, you need to be sure you can afford to repay both loans. Consider any future changes to your circumstances when considering taking on additional debt.
Read your agreementCheck your finance agreement, as some loan types are regulated and include the ‘halves and thirds rule’. This allows you to return the vehicle to the finance company as long as you’ve paid more than half of the total amount repayable under your loan.
How to reduce the risk of negative equity
Sometimes you can’t avoid negative equity. However, these tips should help you stay one step ahead of it:
- Where possible pay a good amount of deposit
- Shop around for a competitive finance rate
- Consider any change of circumstances that may occur during the period you’ll be repaying the loan. The best option is to repay it in full before you change your car
I need to change my car and I have negative equity. What’s my next step?
Average mileage per year
Representative Hire Purchase Example
This quotation is in relation to a regulated Hire Purchase and Fixed Sum Credit Loan agreement. It is not an Offer of credit & is valid for 14 days from the date of creation. Credit is only available to persons 18 years or over. The Car People Offer Credit from a number of finance providers & may receive a payment from them regarding finance agreements written with them.
For Hire Purchase (HP) & Personal Contract Purchase (PCP) loans you will not own the vehicle until the loan has been paid in full.
BE SURE YOU CAN AFFORD THE REPAYMENTS & CONSIDER ANY POTENTIAL CHANGE OF CIRCUMSTANCES THAT MAY AFFECT YOUR ABILITY TO REPAY THE LOAN BEFORE YOU ENTER INTO A CREDIT AGREEMENT.