If you took out a car finance plan, it is still possible to end up with negative equity during and at the end of the contract. Having negative equity means that the car you have on finance is now worth less than the amount of money you are required to pay back to the finance company. Let’s look at an example of this. If you have £5000 on loan left to pay off, and the car I snow worth £3000, you are currently in £2000 worth of negative equity. So let’s see can you trade a car with negative equity, what are your options and why does negative equity happen in car finance:
When Does Negative Equity Happen In Car Finance?
There is no hard and fast reason why a car goes into negative equity. The only reason it happens is that the value of the vehicle has depreciated much quicker than what the finance company initially thought it would.
Factors such as the condition of the car, it’s age, and the mileage on the clock will have an effect on the overall value of the vehicle. There are also other elements like the current economic climate and what the used car market is having that influence what your vehicle will be worth.
Entering into negative equity is a much more common thing if you have a long term financial plan. This is because it’s hard to predict at the beginning of a five-year agreement what the value of the car will be at the end.
A great and easy way to reduce your exposure to negative equity on your car is to make sure you are getting the best deal possible when you first take out an agreement. Take into account how much the difference is between the car value when you get it, and the value at the end of the contract as set out in the agreement. The less amount of money this difference is, the better place you will be in.
Can You Trade A Car With Negative Equity?
There are several options you have if your car is in negative equity, and you want to trade it in.
- Delay the time when you trade-in – There are two things you can do when you’ve gone into negative equity. Delay the time when you are going to trade in the car until the loan amount comes down a bit or pay off the negative equity and trade in the car sooner.
- Pay off the negative equity – If you are desperate for a new car and need it right now, you will have no other choice but to pay off the negative equity to trade the vehicle in.
- Pay off the difference – when you go to trade in your car may want to pay off the gap instead of paying off the equity. This will be the difference between what you owe on the vehicle and the amount of money the dealer is going to give you upon trade-in. One thing you have to make sure of is that there isn’t a prepayment fine on your finance terms.
- Combine the negative equity with the new loan for the car – Making a large payment to cover the equity or difference may not be an option for you. So another option you have here is to roll the negative equity you have on your current car into your new loan payments. This is convenient because you don’t have to pay the negative equity outright, but it does mean you will be adding a substantial amount of money onto your monthly payments.
- Don’t trade your car, sell it instead – Trading in your car isn’t the only option you have when dealing with negative equity. Another road you can go down is selling your vehicle. You will have to check with your finance company whether you are allowed to sell the vehicle during your contract. When you sell the vehicle privately, you are much more likely to get more money from the buyer than you would from a car dealership.
If you are completely confused about your car loan and find yourself in a considerable amount of negative equity, don’t trade your car in. You could end up forking out a lot of money over something that can be avoided entirely. If you’re not sure about the negative equity, then talk to your finance company. They can help you decide whether trading your car in is a viable option or if you should wait until your finance agreement has come to an end.