Negative equity finance
What is negative equity finance?
Negative equity is a term commonly used to describe a situation where the value of property someone owns is less than the amount they have borrowed for its purchase – if your home is worth less than the amount of any outstanding mortgage, for example, you are said to be in negative equity.
Negative equity on the car you are buying presents some particular problems:
- whatever type of financing arrangement you had chosen, you are almost certain to have negative equity in the vehicle for most of the time you are buying it – as a rule of thumb, for example, it is generally accepted that in a hire purchase agreement, you remain in negative equity until you are at least two-thirds of the way through your repayments and with personal contract purchase (PCP) it usually takes even longer;
- for as long as you remain in negative equity, you have a problem if you want to sell your car – or if you need to sell if because your circumstances have changed and you are no longer able to afford the finance repayments;
- in that situation, what you receive from the sale of your car is still not enough to repay the outstanding finance on it;
- this means that you must continue to make the finance repayments even though you no longer have the vehicle.
Financing your vehicle with negative equity
If you default on the repayment of that outstanding balance, you are still in debt to the finance company and your credit rating is going to be adversely affected – any further application for finance to buy a new car, therefore, is likely to be rejected.
If you are in this situation, a possible solution for buying a new car is with negative equity finance. In this case, the finance company advances you not just the funds you need to buy the new car, but also the amount necessary to clear the negative equity on your previous car.
Let’s use some illustrative figures to give an example:
- value of old car – £8,000
- previous finance balance outstanding – £10,000
- negative equity – £2,000
- price of new car – £15,000
- to clear negative equity – £2,000
- total negative equity finance required – £17,000
Negative equity car finance therefore provides the wherewithal not only to buy your new car, but also the funds to clear any outstanding finance (negative equity) on your previous vehicle. So, to find out more, complete your application and get accepted for negative equity car finance.
Set your car loan budget
Representative example – excellent credit Borrowing 7500 over 4 years with a representative APR of 6.9% and a deposit of £0, the amount payable would be £177 per month, with a total cost of credit of £1,035 and a total amount payable of £8,535.