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You’ve probably heard the term “negative equity” in relation to the housing market, rather than car finance. But that doesn’t mean that negative equity can’t affect car finance.
In fact, given the way cars lose value, it is more likely you will experience negative equity.
But what is negative equity and how can it affect your car finance? Nikki the Ninja is here to take you through it.
Representative Example: Borrow £6,000 with £1,000 deposit over 48 months with a representative APR of 18.8%, monthly payment would be £174.22, with a total cost of credit of £2,362.56 and a total amount payable of £9,362.56. CarMoney Limited can introduce you to a limited number of finance providers based on your credit rating and we will receive a commission for such introductions this can either be a % of the amount borrowed or a flat fee. This does not influence the interest rate you’re offered in any way. CarMoney is a broker not a lender.
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What is negative equity? It’s simple really.
Negative equity means that the outstanding balance on a car loan exceeds the vehicle’s actual worth. And while it sounds bad, it is fairly commonplace – especially at the start of the loan period.
That’s because one of the primary culprits behind negative equity is depreciation. As soon as a new car leaves the dealership, it begins to lose value. This rapid depreciation, particularly in the first few years, can outpace the rate at which the borrower pays off their loan.
Negative equity can be worsened if you take a longer loan. While they may offer lower monthly payments, a longer repayment period means that the vehicle has more time to depreciate, potentially surpassing the rate at which the borrower is paying off the loan.
So is negative equity a bad thing? It sounds like it is, but the answer is more of a “it depends”.
In the housing market, negative equity can be a huge negative. But that is because people are more likely to plan on selling their house and downsizing, perhaps to fund their retirement. If their house is worth less than their mortgage, that can have a massive effect on their plans.
But that’s because houses tend to grow in value over time. Cars don’t.
Nobody buys a car thinking it will fund their retirement plans – unless they are a classic car dealer.
However, negative equity on your car can have negative consequences – it just depends on the circumstances.
When a borrower trades in a car with an outstanding loan balance, that balance is typically rolled into the new loan. This means the buyer not only finances the new car but also carries the residual debt from the old one.
Selling a car with negative equity often means you need to pay the difference in the car finance out of pocket.
So, you want to avoid negative equity, as much as possible. But how do you do that?
Prior to committing to a car loan, you should research the depreciation rates of the vehicles they are considering and opt for shorter loan terms whenever possible.
If you can make a larger deposit, this will reduce the loan balance and reduce the likelihood of negative equity.
At CarMoney, we can find you lenders that suit your individual financial circumstances and needs, whether that is avoiding negative equity or paying off car finance over a longer period of time.
Get a quote or contact CarMoney today.
Frequently Asked Questions
What is negative equity?
Negative equity arises when the value of your home decreases, resulting in a situation where the outstanding mortgage balance exceeds your property’s current worth. This circumstance can pose challenges when attempting to sell or refinance your home. Consider options such as waiting for the market value to increase, making additional payments to reduce the mortgage balance, or potentially selling the property and downsizing to a smaller home.
What if I owe more than my current car is worth?
When the amount you owe on your current car is more than its current market value, it is called being “upside down” or having negative equity. This means that if you were to sell your car today, you could not pay off the loan in full. In this case, you may need to carry over the remaining debt to a new car loan, which could impact the terms of your new loan.
Why is negative equity a problem?
Negative equity can be a problem for a few reasons:
- It can make it difficult to sell or trade in your car: If you need to sell or trade in your car, you will need to pay off the balance of your car loan in full. If you have negative equity, you will need to come up with the difference between what you owe on the loan and what the car is worth.
- It can make it difficult to refinance your car loan: If you want to refinance your car loan to get a lower interest rate or better terms, you may have difficulty doing so if you have negative equity.
- It can make it difficult to get approved for a new car loan: If you need to buy a new car and you have negative equity on your current car loan, you may have difficulty getting approved for a new car loan.
What can I do if I have negative equity on my car loan?
If you have negative equity on your car loan, there are a few things you can do:
- Make extra payments on your loan: This will help you pay off the loan faster and reduce the amount of negative equity you have.
- Refinance your loan: If you can find a lender who is willing to refinance your loan, you may be able to get a lower interest rate or better terms, which can help you reduce your monthly payments and pay off the loan faster.
- Sell or trade in your car: If you can sell or trade in your car for more than what you owe on the loan, you can use the proceeds to pay off the loan and eliminate your negative equity.
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