Negative Equity?

Mar 10, 2020 | All About Cars | 0 comments

You may have heard of the term negative equity when speaking to someone regarding finance – but what does it mean? 

Car finance is one of the most popular ways of purchasing cars as it enables customers to drive away with the car they want with barely little payment. 

However, one of the biggest problems you could face is negative equity. Vehicle ‘equity’ is the term given to the difference between what you owe to the finance company and what your vehicle is actually worth, during or at the end of your finance agreement.

For example, say you took out a PCP agreement to buy a car and after two years, you still owe the finance company £8,000. This is your current value settlement. But, the actual current value of your car is only £6,000, so if you wanted to sell it, or put it towards your new finance agreement, you would have to cover the negative equity of £2,000.

When a vehicle depreciates in value more quickly than a customer repays the loan on it to the finance company. It’s normal for a vehicle to depreciate in value over time, however, if there is a significant difference when it comes to selling or part exchanging your car, it can prove to be problematic. 

Negative equity finance allows you to pay for a new car or van, whilst still repaying your previous finance agreement. Payments on the two vehicle finance deals are combined and paid as one fixed monthly payment. This allows drivers to pick a less expensive car or van model or take out finance on a new car with lower monthly payments. 

As long as the new car or van you pick is substantially cheaper than your existing vehicle, it should bring your costs down overall.

If you’re confused regarding negative equity or have any questions please do not hesitate to speak to us directly. It can be tricky to know what the best option is when it comes with car finance! You can find our contact details here.

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