Outstanding car finance

Outstanding finance is the amount still owed on a vehicle. The borrower is responsible for the outstanding balance.

We’ve collected some of the most frequently asked questions about outstanding car finance and negative equity to help you understand what it is and what can be done about it.

What is negative equity?

Negative equity is when the car is worth less than the outstanding amount owed – also known as an "upside down" loan. For instance, if your car is worth £6,000 but your settlement figure is £8,000, you have £2,000 negative equity.

It means that even if you sold the vehicle to clear the loan, you’d still be unable to pay it all off.

Usually, this is because the car lost value faster than you repaid the loan. It’s normal for this to happen at the very beginning of a finance agreement, but if it’s still the case when you’re approaching the end of one then it can become a problem.

It might also be because you paid more than the car was worth, or because something out of your control (like a fault being discovered) caused its value to drop suddenly.

How do I get out of negative equity?

Getting out of negative equity can be tricky. In most circumstances, the value of a car only goes downwards, so waiting for it to rebound isn't an option. If you can continue making the payments until the end of the deal, this is usually the best thing to do.

If your car is in negative equity and you want to change it, you may be able to finance more than the value of the new car, essentially refinancing your negative equity into the new agreement. However, this is dependent on the lender and your credit rating.

Can I part exchange a car with negative equity?

If you need to change cars, you can part exchange a car with negative equity, as long as you can afford the new loan. The negative equity can be rolled into a new loan agreement, which means you will be borrowing more than the value of the car.

What is the best approach to dealing with a negative equity part exchange?

Usually, the best approach is to calculate how much negative equity you are in, and continue repaying the loan – once it’s completely paid off, you won’t have negative equity.

If you’re unable to repay the loan, contact your lender and explain the situation.

What are your options?

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.

Continue repayments

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 agreement

Check 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 do I avoid negative equity in future?

Some of the best ways to avoid or minimise the risk or negative equity include:

  • Avoid bringing additional debt into a car finance deal – settle other agreements first if you can.
  • Put down a bigger deposit. The higher your deposit, the less you have to repay over the course of the deal.
  • If you’re on a contract product such as PCP, stick within the agreed mileage. Your car depreciates more quickly the more you drive.
  • Opt for shorter term agreements. While the monthly payments might be higher, you’ll be paying down the debt more quickly. You may be able to make overpayments too.
  • Think carefully about extras and trim levels on a new car. These increase the price, but not necessarily the long-term value.

I need to change my car and I have negative equity. What's my next step?

Using our calculator below you can roughly value your part exchange along with entering your settlement, any deposit you have, the monthly payment you can afford and the period you want to repay the loan over. From there we can show you what cars fit your budget.

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