What is negative equity in car financing?

However, if you want to get out of the HP agreement and you haven’t paid 50 percent of the car’s financing (the point at which the Consumer Credit Act says you can end an HP agreement early without penalty), you have to to make up the deficit by up to 50 percent. This isn’t technically negative equity, but it does mean you have to pay the odds for the period you ‘owned’ the car.

Personal contract purchasing and negative equity

Buyers are typically protected from negative equity when car financing through a personal contract, or PCP, through a guaranteed minimum future value, or GMFV. As the term implies, a GMFV means that the PCP deal explicitly states what a car will be worth at the end of the financing period, essentially based on a car’s predicted depreciation (itself partly a function of the mileage limits typically imposed on PCP deals).

In other words, by the time you make the monthly payments you shouldn’t have negative equity because the GMFV means the car is valued at exactly what the financing company said it would be. You can then choose to pay this amount as a balloon payment and drive away, with the car now completely yours, or you can hand it back to the finance company without the worry of negative equity. If the car is worth less, that is actually the finance company’s problem and not yours.

Selling a financed car with negative equity

This is where you are most likely to experience negative equity with a car with financing. If you sell the car while you’re still paying it off, there’s a chance the money you get for the car will be worth less than what you get. is still to blame for that.

That said, you should contact the finance company before selling the car, as in most cases they will own the car until you pay it off. It is illegal to sell a car with outstanding financing. You may be able to terminate the contract early, although you will of course have to pay the remainder of your debt, which is when you could face negative equity issues.

How to avoid negative net worth

The easiest way to avoid negative equity is to avoid ending your financing contract prematurely. As long as you have a contract, you are largely protected from negative equity because the financing terms are written so that the burden of a car’s depreciation falls on the financing company and not the individual. A guaranteed minimum future value means you don’t have to worry about negative equity on a PCP, while GAP insurance offers good protection if you have an accident in a car you still have to pay off.

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