You may have heard that your car finance is in positive or negative equity but wondered what that really means and what you could do about it. If so, you're in the right place.
What is the meaning of equity?
Equity is the difference between what your car is worth and how much you owe for it.
Current value of your car
Ourstanding car finance
Equity is really important in car finance. It only applies to purchase finance products such as Personal Contract Plans (PCP) and Hire Purchase (HP).
Watch our video to learn about positive and negative equity, what a parity position is, and how this can help you finance your next car.
Positive car equity is when your car is worth more than the amount you still owe on finance. For example, the current market value of your car is £10,000 but you still owe £7,000 on your finance. This leaves you with £3,000 worth of positive equity.
Being in positive equity puts you in a good position if you would like to change your current vehicle for a new car.
Negative car equity is when your car is worth less than the remaining finance. For example, today your car is worth £10,000 however you have £12,000 of finance to pay still. This puts you in negative equity of £2,000.
Below are some of the reasons you might experience negative equity:
1. Your finance agreement is fairly new
At the start of your finance agreement, the total amount you owe the finance provider may include the amount you’re borrowing (the value of the car), the interest, and any fees. The initial amount of finance owed can be greater than the value of the car. Cars also typically depreciate in value once they are driven. As the cars depreciation slows, and you continue to make your monthly payments you will likely reduce the amount of negative equity.
2. Your car is not in the best condition
It's important that you look after your car to help it keep its value. This means keeping it clean and getting any damage repaired to a good, professional standard.
3. Market changes and industry challenges
Consumer trends, local demand, laws and legislation and supply challenges can all impact a cars value. These are macro elements outside of customers’ control, but may have an impact on the cars value.
4. You put down a low deposit
If your deposit was small, the amount of finance owed is larger. This means more monthly payments are required to bridge the gap getting you closer to parity, or positive equity.
If you're ever unclear about your car finance position speak to your finance provider. They should be able to give you advice based on your finance product and personal situation.
Financing your next car
You may reach a point where you could trade-in your car and change it for a brand-new, or used one for a similar monthly payment. If this does happen, your dealer or finance company may get in touch with new offers for you to consider.
They can also help you work out the equity left in your car, and whether it’s enough for you to pay off any outstanding finance whilst still having enough to use as a deposit for a new car with a new finance plan.
Insurance that covers your finance
During your finance contract you may move between parity, positive and negative equity positions. Having the right insurance in place, GAP (Guaranteed Asset Protection) insurance specifically can help to ensure you're not out of pocket if your car gets written off. If your car is written off, your motor insurer will usually pay out based on the current market value of your car. This could be a lot less than its original value and therefore may leave you with an unexpected shortfall. Find out more about our GAP Insurance product here.
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