This guide explains everything you need to know about negative equity on a car, including what it is, how it happens, and what you can do if you find yourself in it.
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Negative equity simply means that the amount you still owe on your vehicle finance is more than what the car is currently worth.
For example, if your car is worth £8,000 and your outstanding finance balance is £10,000, you'll have £2,000 of negative equity.
Negative equity can occur on most types of vehicle finance, i.e. Hire Purchase (HP) and Personal Contract Purchase (PCP), and can apply to vans and motorbikes bought on finance too - not just cars.
Negative equity on a car happens when the car's market value drops faster than your finance balance reduces. Because vehicles depreciate quickly - especially in the first few years - it's common for drivers to be in negative car equity early in a finance agreement.
This doesn't necessarily cause a problem if you plan to keep the car until the end of the agreement. Issues usually arise when you want to change, sell, or part-exchange the vehicle early.
Negative equity car finance can happen for a number of reasons:
The type of finance you choose can affect how likely you are to fall into negative equity. Hire Purchase and Personal Contract Purchase work in different ways, which means the risk of negative equity can vary between the two.
Whatever option you choose, negative equity is usually only an issue if you want to change, sell, or part-exchange the vehicle before the agreement ends.
Just so you know... we can only provide Hire Purchase car finance.
Being in negative equity doesn't automatically cause problems. You can usually continue making payments as normal. However, it can limit your options if you want to:
If the car's market value is less than the finance balance, you'll need to pay the difference before ownership can be transferred. This can require a lump sum, which may not always be feasible.
Negative equity itself does not affect your credit score.
Your credit score is impacted by how you manage your finance agreement, not by the value of the vehicle. As long as you make your repayments on time and stick to the agreement terms, your credit file should not be negatively affected.
There's no fixed rule for how much negative equity is too much. It depends on:
• The lender's criteria
• Your credit profile
• Your income and affordability
• The value of the new vehicle
As a general guide, smaller amounts of negative equity are easier to manage or refinance than larger balances.
If you're wondering how to get out of car finance with negative equity, your options may include:
• Keeping the vehicle until the finance balance reduces
• Paying a lump sum to clear the negative equity
• Refinancing onto a new agreement (subject to approval)
• Choosing a lower-cost replacement vehicle
A specialist lender like First Response Finance can help you explore realistic options based on your circumstances.
You can reduce the risk of negative equity by:
• Paying a larger deposit
• Choosing a shorter finance term
• Avoiding unnecessary extras in the finance amount (if there is any)
• Buying a vehicle with stronger resale values
• Keeping mileage and condition within expectations
Yes, you can sell a car with negative equity, but you'll need to:
The finance must be cleared before ownership of the car can be transferred.
Yes, it's possible to part-exchange a car with negative equity. In some cases, the negative equity can be added to a new finance agreement, subject to lender approval and affordability checks.
The amount of negative equity you can finance depends on:
There's no guaranteed limit, which is why it's best to speak to your lender about what their limits are.
If you're dealing with negative equity, there are ways to protect yourself and explore new finance opportunities. Here's what you need to know about GAP insurance, transferring negative equity, and securing car finance when you're in negative equity:
GAP insurance can help in certain situations, such as if your car is written off or stolen. It may cover the difference between the insurer's payout and your outstanding finance, which can include negative equity - but only within the policy limits and terms.
In some cases, yes. Negative equity can sometimes be transferred to another car by including it in a new finance agreement. This depends on lender approval, vehicle value, and affordability.
Yes, specialist lenders like First Response Finance can provide vehicle finance on a new car even if you have negative equity on your current car.
Being in negative equity doesn't have to be the end of your car finance journey. First Response Finance can help you explore your options for managing or refinancing negative equity!
Our experienced team will take the time to understand your situation and explain your options clearly, with no pressure and no jargon.
This page was last reviewed in December 2025.
First Response Finance is a responsible vehicle finance lender, and all decisions are made in the best interests of the customer; based on credit scores, status, and income at the time of application. We'll never approve an application if we believe you might struggle with repayments.
Get independent advice on money, finance products, debt management, and budgeting through Citizens Advice and MoneyHelper.
