Negative equity sounds like something that goes wrong. On car finance it is ordinary, and most people are in it for a stretch of every agreement without ever noticing.
It only becomes a problem if something happens to the car while you are in it.
What it actually means
You are in negative equity when the outstanding balance on the agreement is higher than the vehicle is worth.
This happens because the two figures fall at different speeds. Depreciation is steep in the early years and then flattens. Your balance reduces in a straight line, or in the case of a PCP, barely reduces at all until the balloon payment at the end.
For the first part of most agreements, depreciation is winning.
When the gap is widest
Typically somewhere between months six and thirty, though it depends entirely on the deposit and the term.
Three things widen it. A small deposit, because you started closer to the line. A long term, because the balance comes down slowly. And rolling an existing balance from a previous vehicle into the new agreement, which starts you in negative equity on day one.
A PCP deserves its own mention. You are funding depreciation rather than the car, so the balance stays high until the balloon is dealt with, and the negative equity window can run most of the term.
Why it matters if the car is lost
Your motor insurer pays market value, which is the lower of the two figures. The finance company is owed the higher one.
You pay the difference, on a vehicle you no longer have, usually having also lost the deposit. Nothing about losing the car reduces what you owe.
How to work out where you stand
Ask your finance provider for a current settlement figure. Then look at what comparable vehicles of your age, mileage and condition are actually selling for.
If the settlement figure is higher, you are in negative equity today, and that number is what you would be funding yourself in a total loss.
What GAP does about it
Finance GAP covers the difference between the insurance settlement and the outstanding balance, so the agreement is cleared rather than left with you.
Return to Invoice goes further and works from the price you paid, which also recognises the deposit. Which suits depends on how you funded the car.
Worth noting that balances rolled over from a previous agreement are generally excluded, so check that if it applies to you.
Checking your own figures
Two numbers settle it: your settlement figure and a realistic valuation.
To talk through what you find, call us on 0161 388 2550 or email sales@gapinsurancetoday.co.uk.
