Negative Equity Factsheet
What is Negative Equity and what impact may it have on your purchase?
Negative equity occurs when the market value of the existing vehicle is less than the amount needed to settle the current finance agreement. For example, if a car has a current market value of £6000 and the early settlement figure on the current finance agreement is £8000, the value of the negative equity is £2000.
You will normally need to pay the value of any negative equity when part exchanging your car in order to settle an existing finance agreement. This may be done by either paying a cash deposit equal to the value of the negative equity, or by re- financing the value of the negative equity by adding it to the finance agreement for your new car (see 'Your Options' below for further details). However, if you do choose to refinance the negative equity and add it to the new finance agreement, this may limit the range of finance agreement packages available to you. This may also limit the range of interest rates available and may increase the cost of your overall purchase. You should therefore carefully consider what is the best option given your circumstances, and always seek independent financial advice if you are in anyway unsure.
Negative Equity – Your Options
- Make an additional cash deposit. The value of the negative equity may be cleared by making an additional cash deposit. This is paid to the Motor Dealer in addition to the deposit required for the purchase of your new car. This option may provide you with the widest choice of possible finance packages for your new car and avoids the additional costs often incurred through the need to refinance the negative equity.
- Refinance the negative equity as part of the finance agreement arranged by the motor dealer. Subject to status, terms, and conditions; you may be able to transfer the value of any negative equity to the finance agreement for your new car. Although this may avoid the need for an additional cash deposit, it's important to note that this means that you may need to borrow more than the value of your new car. This may substantially limit the choice of finance packages and APRs available to you. It's also likely to increase the overall cost of your purchase, both in the monthly payment and the total amount payable. You should carefully consider whether this is the best option given your circumstances, and seek independent financial advice if you are in anyway unsure.
- Refinance the negative equity with a loan provided by a third party. Similar to above, you may alternatively seek to transfer the value of any negative equity to another loan or financial product with a third party lender. This option may allow you wider choice of financial packages from the Motor Dealer. Examples of third party finance products include, but are not limited to, credit cards and bank loans. You should arrange this directly with the third party lender. The funds necessary to clear the value of the negative equity must be paid to the Motor Dealer prior to you collecting your new car. You should carefully consider the features and costs of any such product and only commit to it if you are sure if meets your circumstances. Always seek independent financial advice if you are in anyway unsure.
- Voluntary termination. Your existing finance agreement may contain rights which enable you to voluntarily terminate it. This means that Under the Consumer Credit Act 1974 you may have a right to end any regulated hire purchase or conditional sale agreement at any time before the final payment under your agreement falls due. This is known as voluntary termination. Please refer to your existing agreement terms and conditions which may contain a paragraph titled “Termination: Your Rights”. Your existing finance provider will also be able to confirm whether this right is available to you and how to do it. The fact that you have chosen to terminate your agreement will also be recorded with the Credit Reference Agencies as a voluntary early termination of the agreement on your part. This information may be used by other finance companies when assessing you for credit in the future. If this option is available to you, you may wish to consider it as an alternative to paying the value of the negative equity to your existing lender. If you are in anyway unsure, you should seek independent financial advice.
- Defer the purchase of your next car until some point in the future. You are under no obligation purchase a new car or to enter into a new finance agreement. By deferring your purchase until some point in the future and continuing to make payments on your existing finance agreement, you may reduce the value of the negative equity. However, this is not guaranteed and your existing vehicle is likely to continue to depreciate due to increased age and mileage. You should carefully consider whether this is the best option given your circumstances and needs, and seek independent financial advice if you are in anyway unsure.
You can find out more about this, and other finance options, at www.moneyadviceservice.org.uk