Managing your finance
Negative Equity on Car Finance: What It Means
What negative equity means on car finance, why it happens, and how to get out of it.
Negative equity on car finance means you owe more than the car is worth, so settling the finance would cost more than selling the car raises. It's common in the first half of a PCP or HP, when the car drops in value faster than you pay it off.
Being in negative equity isn't a crisis — but it does shape your options if you want to sell, part-exchange or change cars. Here's how it works and how to get out of it.
What is negative equity?
Negative equity is when your settlement figure is higher than the car's current value — the finance balance has outrun what the car would sell for.
Equity is simply the car's value minus what you owe. If that number is positive, you have equity to keep; if it's negative, you'd have to top up to clear the finance. Check yours on the negative equity calculator.
Why negative equity happens on PCP and HP
Negative equity happens because cars lose value fastest early on, while your finance balance falls more slowly. A small deposit and a long term make it worse.
On a new car, depreciation is steepest in the first two years. If you paid little upfront and spread the cost over five years, you can owe more than the car is worth for much of the deal. A bigger deposit and a shorter term cut the risk.
How to get out of negative equity
You get out of negative equity by paying the finance down faster than the car loses value, or by waiting for the gap to close. A few options can help.
- Keep the car and keep paying — equity usually turns positive in the second half of the term.
- Overpay to clear the balance faster and shrink the gap, using the overpayment calculator.
- Pay the shortfall in cash if you need to sell now.
- Use voluntary termination if you've paid 50%, to cap your loss.
Can you part-exchange in negative equity?
You can part-exchange in negative equity, but the shortfall doesn't disappear — it's either paid off or rolled into your next agreement. Rolling it in means borrowing more on the new car.
Some dealers offer to 'clear' your negative equity, but that usually means adding it to the new finance, so you start the next deal already underwater. Work out the real numbers on the settlement calculator before agreeing. See the full method in selling a car on finance.
Rolling over debt
Frequently asked
What does negative equity mean on car finance?
Why am I in negative equity?
How do you get out of negative equity?
Can you part-exchange a car in negative equity?
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