Let’s say that you have a car that has been yours for some time, but though the end date of the agreement is some time away, you have decided that the vehicle has outlived its usefulness and so you wish to trade it in. The only tricky part is, you have negative equity. This raises the question as to how you can trade in a car that has negative equity or outstanding finance which we will now delve into, but first we have to identify what negative equity actually is.

What is Negative Equity?

Negative equity essentially means that the value of your car is lower than what you will be required to pay for the remainder of a finance plan, and is more common in the early stages of a plan. This is also known as an Upside down loan. So, as an example, we’ll suggest that you are paying £400 per month for your car on a five-year plan, meaning £4,800 per year, and £24,000 in total. You decide at the end of the second year that you want to trade in the car, at which point the remaining amount that needs to be paid is £14,400. But the value of the car has dropped since you first bought it, and so the vehicle’s value is £12,000. At this point, you would be £2,400 in negative equity, because the difference between its value and what you still have to pay is in the favour of the loan rather than the motor.

Now bear in mind that if you were in the final year of the plan, chances are that this particular vehicle would have a value greater than £4,800, meaning that you would not have the dilemma of negative equity, but the caveat is that, with less than 12 months remaining, would it really be financially beneficial for you to trade in the car at that point? On the reverse side, perhaps you have no choice but to try and trade in a vehicle due to financial problems, but having negative equity only complicates matters. And then there’s the positive side, where you have 18 months-2 years remaining on a plan, but the value of the car remains higher, so you avoid negative equity. Therefore, it is vital to consider exactly what the car is worth and how much you still have to pay, because negative equity can make it sound like a major challenge to trade in your car – but it’s not impossible.

One option is to simply pay off the loan and then, after trading in your existing motor, you would have a clean slate for your next car finance agreement. Alternatively (and this is a more common option), you can continue paying off the previous loan on top of your next finance plan, so for a new vehicle, you might be paying £350 per month, but with an extra £100 per month to complete paying off the previous model. That way, you’re settling the outstanding loan slowly but surely, while not prohibiting you from trading in and changing cars. As we mentioned, though, you should be aware of how much you have to pay and, more importantly, how much you have already paid, because the terms and conditions of your plan could mean that, having paid a large percentage of the loan already, what you will have to pay to the finance company to end the agreement early and trade in your car could be a lot lower than you would think.

So, negative equity is something to be mindful of, and should your car be in negative equity, you need to be careful as to how you resolve the issue, though it is still entirely possible for you to trade in the vehicle and move forward.

Want to know more about  negative equity outstanding car finance? Call us on 01925 599079.

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