What is negative equity in car finance?
Owning a car is exciting – but when it comes time to sell or upgrade, some drivers find themselves in negative equity, meaning their car is worth less than the remaining finance. This can create a difference you’d need to pay if the car is sold before the agreement ends.
Motorway can help. We make selling your car with negative equity simple, giving you a fair, honest deal that reflects the current market value of your car.
In the UK, most new cars – and more and more used cars – are bought on finance. Equity in car financing is simply the difference between your car’s market value and the amount you still owe. If your car’s value is lower than your loan, you’re in negative equity. If it’s higher, you’re in positive equity.
Selling a car in negative equity means covering the difference. Selling in positive equity means having extra funds to put towards your next car.
- Negative equity 101
- What is a Guaranteed Future Minimum Value?
- What is the FCA redress scheme?
- What causes negative equity?
- How can I avoid negative equity?
- How can I manage negative equity?
- FAQs
Negative equity 101
Equity in car financing can be positive or negative, depending on whether your car is worth more or less than your outstanding loans. In the UK, most car financing agreements are arranged so that you begin and stay in ‘negative equity’ for at least half of the duration of your contract.
Your car’s equity changes over time as your car’s value depreciates, you pay off your loans, and in response to global market conditions. Car values depreciate quickly after purchase, while your loan repayments may reduce your balance more slowly. Over time, depreciation usually slows, and you may reach positive equity, but this depends on how much you pay off, interest rates, and market conditions.
Positive equity can be advantageous when you decide to sell your car. As your car value is greater than your outstanding finance, when you sell on positive equity, you can receive and pocket the extra funds.
However, if the depreciation of your car’s value outpaces your loan payments, so you continually owe more than your car is worth, you will stay in negative equity. Having negative equity can limit your ability to sell or trade in your car without incurring financial losses. You might find yourself owing money even after selling it.
Being in negative equity on your car finance can limit the feasibility of upgrading to a new car, but understanding the changing value of your financed car is a great way of getting much better value and making the best decisions about when to sell.
What is a Guaranteed Future Minimum Value?
On a PCP car financing agreement (Personal Contract Purchase), the Guaranteed Minimum Future Value (GMFV) is the amount your finance company sets for your car at the end of the contract. It is also called the Guaranteed Future Value, balloon payment, or optional final payment. It is a contractual figure, not necessarily the true market value of your car.
- If your car is worth more than the GMFV at the end of the agreement, you can use the extra value toward your next set of wheels.
- If it’s worth less, handing the car back may protect you from loss, because you only need to pay the GMFV to keep it.
It’s important to check the terms of your GMFV, including mileage limits, wear-and-tear rules, and maintenance requirements, as these can affect your equity position.
Additionally, under new FCA guidance in 2026, some older finance agreements may be eligible for mis‑selling redress, which could impact your effective equity or provide compensation if your deal was sold unfairly.
What is the FCA redress scheme?
Some car finance agreements sold in the UK between 2007 and 2024 may have been mis‑sold, often due to undisclosed dealer commissions or unclear terms.
The Financial Conduct Authority (FCA) is implementing a redress scheme in 2026, with the current pause on complaint handling set to lift on 31 May 2026. If your agreement qualifies, you may be entitled to:
- Compensation for any overpayments or unfair charges.
- A reduction in your effective negative equity if the redress applies to your loan.
It’s worth checking with your lender or a trusted claims service if you think your finance deal could be affected. This could help improve your equity position or provide a financial refund.
What factors impact car equity?
Similar to the value of your car, a variety of factors influence the value you will get from your car financing agreement. The lower your car’s valuation is and the higher your interest rates, the less value you’ll get.
How can I avoid negative equity?
Valuation
The faster your car’s value depreciates, the higher the risk of remaining in negative equity. The factors within your control that drive depreciation are mileage and condition. When purchasing a car, consider reputable car brands and models known for retaining value.
Financing Agreements
If you’ve agreed to a longer-term finance arrangement to cut down on monthly repayments, you’ll likely end up paying more in the long term thanks to compound interest. Shorter loan terms help you pay back your principal quicker, reducing time spent in negative equity. Maintaining a good credit score can also help you secure favourable interest rates.
Repayments
The best way to tip into neutral or positive equity is to increase your monthly payments, or even make some overpayments if possible. This helps you pay off your debt (and its compounding interest) quicker than your car value depreciates. This tactic helps align your car’s value with your outstanding loan and reduces your total loan repayment time.
How can I manage negative equity?
- Repay negative equity upfront – If you’re financially able, one way of managing negative equity is settling your outstanding loan balance, or at least the amount that exceeds your car’s current market value. By proactively closing the equity gap, you can get rid of your negative equity and align your loan balance with your car’s worth.
- Refinance and roll negative equity into a new loan – Explore refinancing options to roll the deficit into a negative equity finance deal. Although this will extend the length of your monthly payments, it provides immediate financial relief by incorporating the negative equity into a new arrangement.
- Sell your car privately – Selling your car can be a strategic move to minimise financial losses. Private sales often fetch higher prices than trade-ins, helping bridge the financial gap between your outstanding loan and the car’s market value.
FAQs
How can I finance my car if it has negative equity?
Securing car finance with negative equity is challenging. Lenders may consider it, but interest rates might be higher. A larger down payment or trading in a current car with positive equity improves your chances of approval.
However, there are options available. These include rolling the negative equity into a new loan, paying it upfront, or finding lenders specialising in such situations. Higher interest rates or extended loan terms may apply, so be sure to carefully evaluate financing possibilities.
How can I avoid negative equity car finance in the future?
Avoid negative equity by choosing a new car with strong resale value, opting for shorter loan terms, making larger down payments, and staying informed about market trends. Regularly reassess financial situations to align with car depreciation rates.
What steps should be taken when applying for car finance with negative equity?
When applying for car finance with negative equity, it’s important to assess the extent of their negative equity and explore refinancing options. Seeking lenders experienced in handling negative equity scenarios. Know all of your options, from larger down payments to different interest rates and loan terms, before making a financial decision.
How can I track the value of my car?
If you’re not sure what your car’s value is to begin with, it’s hard to know how much money being in negative equity might take off the price.
All vehicles depreciate at varying rates, with no rule of averages accurately describing any one car’s changing value. Motorway’s Car Value Tracker provides a free, reliable monthly price alert for up to six vehicles at once.
Follow changes to your car’s value to choose the best time to sell, and make informed choices about investments in your car’s maintenance.
Should you sell your car?
Want to learn more about the best ways to sell your car? Check out more of our guides here, covering everything you need to know about different finance schemes, and what they mean for you as a car owner.
The information provided on this page is for general informational purposes only and should not be considered as professional advice.