![]() ![]() If your car is stolen or written off for any reason, you may find that the market value paid out by the insurance company for the car is less than the amount still owing to the finance company – and it’s still your responsibility to pay the finance company what is owed. This means PCP customers may be technically in negative equity for some periods of their contracts, but by the time the end of the contract comes around, things have balanced themselves out (and as discussed earlier, even if this hasn’t happened, any shortfall in GMFV is the finance company’s problem, not yours). That depreciation curve becomes more gentle as time goes on, but there may be a period of time when the amount you owe on the vehicle is more than it is worth. So how does negative equity happen?ĭepreciation tends to hit cars hardest in the early months, with vehicles losing value as soon as they are driven away from the showroom. This does mean, however, that you won’t have any overpayments (AKA equity) to help towards a new car on another PCP deal. If the car is only worth £8,000, the car is technically in negative equity – but this is not your problem, it is the finance company’s. If this happens, you can use the £2,000 to go towards the deposit of a new car, if you stick with the same finance company – although you can’t take this amount as cash if you decide to walk away. ![]() It’s not really equity, though – it’s actually that you have paid off more than the car has depreciated. If the car is worth more than the GMFV – let’s say £12,000 – after four years, you have £2,000 ‘equity’ in the car. After the deposit, that leaves you paying £15,000 in monthly repayments over four years, which works out at £312.50 a month. You put a £5,000 deposit down, and the car’s GMFV is set at £10,000 – that’s the minimum amount the finance company and you agree the car will be worth after four years. October 2013 Buying and Selling DealershipĪs an example, let’s say you choose a car costing £30,000 on a 0% interest PCP deal that runs over four years. However, because that figure is contractually set, any shortfall in the car’s value – negative equity – is the responsibility of the finance provider, not you. It is possible that the car will be worth less than the GMFV at the end of the deal. The deposit and the monthly repayments you make during a PCP contract pay off the depreciation the car experiences over the course of the deal.Īt the end of the deal, the final balloon payment is based on the car’s GMFV, which is predicted based on historic trends and the type of car in question. This means it is contractually impossible to be left in negative equity if you adhere to the terms of the deal.Ī PCP deal comprises three parts: the deposit, the monthly repayments and the final, optional ‘balloon’ payment that comes at the end of the deal. This is because the vast majority of privately owned new cars are obtained via Personal Contract Purchase (PCP), which sets a guaranteed minimum future value (GMFV) that the car will be worth at the end of the finance period. In the main, negative equity is not a significant issue where new-car finance is concerned. Here, we detail what these are, and what you can do to avoid them. When it comes to cars, negative equity is far less likely to happen, but there are some specific circumstances where it could occur. This is both an uncomfortable idea, and can cause difficulties if you wish to sell your house. Negative equity is most commonly associated with houses, where the value of a home is less than the amount owed against it on your mortgage. Concerned about negative equity with cars? Our guide has all the details ![]()
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