Negative Equity Car Finance Calculator

Amount to Finance for New Car:

Understanding Negative Equity in Car Finance

Negative equity, often referred to as being "upside down" on your car loan, occurs when the amount you owe on your current vehicle is more than its current market value. This situation is common with car loans due to depreciation, especially in the early years of ownership or if you have a longer finance term.

Why Does Negative Equity Happen?

• Depreciation: Cars are depreciating assets. Their value drops significantly the moment they are driven off the forecourt and continues to decrease over time.
• Loan Terms: Longer loan terms mean lower monthly payments but also mean you pay more interest over time and it takes longer to build up equity in the car.
• Interest Charges: A substantial portion of your early loan payments often goes towards interest, meaning the principal loan balance reduces slowly.
• Market Fluctuations: Sometimes, the used car market can drop unexpectedly, reducing the value of your vehicle.

How the Calculator Works

Our Negative Equity Car Finance Calculator helps you quantify this situation and understand the financial implications when considering a new car purchase. It calculates:

• Negative Equity: This is the core of the calculation. It's determined by comparing what you owe on your current car against its current market value.
  Formula: Negative Equity = Outstanding Finance Balance - Current Car Market Value
• Amount to Finance for New Car: When you trade in a car with negative equity, that shortfall needs to be covered. It's typically added to the price of your new car.
  Formula: Amount to Finance = New Car Price - Deposit/Trade-in Contribution + Negative Equity

Example Scenario

Let's say you want to trade in your current car and buy a new one:

• Your current car is valued at £8,000.
• You still owe £12,000 on your existing car finance.
• You've found a new car you want for £20,000.
• You have a deposit of £1,000 (or a trade-in value that amounts to this much after covering any potential positive equity).

Calculation:

• Negative Equity: £12,000 (Outstanding Finance) – £8,000 (Car Value) = £4,000. You are £4,000 upside down on your current car.
• Amount to Finance: £20,000 (New Car Price) – £1,000 (Deposit) + £4,000 (Negative Equity) = £23,000. This is the total amount you would need to finance for the new car.

What to Consider with Negative Equity

• Increased Loan Amount: As seen in the example, negative equity increases the total amount you need to borrow, leading to higher monthly payments or a longer finance term.
• Higher Interest Costs: Financing a larger sum means you'll pay more interest over the life of the loan.
• Future Depreciation: You'll be financing a vehicle that also depreciates, potentially leading to future negative equity if you wish to trade it in again.
• Alternatives: Consider waiting to pay down more of your current loan, trying to sell your current car privately to get a better value (though this can be complex with outstanding finance), or delaying the purchase of a new vehicle.

Using this calculator can help you make a more informed decision about your car finance options and understand the financial impact of negative equity.