Negative equity— An overview
One of the first things you need to know about is equity. The term refers to the difference between what your car is worth and what your actual loan debt is.
If you have a car that is worth more than the actual loan debt, then what you have is a positive equity, but can just be considered equity as well. However, if you end up with a car that is worth less than the loan debt, then you have a negative equity issue.
To illustrate, if you happen to have a loan where you still owe £4000 and your car is currently at £8000, you have the option to sell the car and then pay off your balance and still have equity or money left.
If you have negative equity, however, then the opposite happens. This means that even if you sell the car and you use all the money to pay for your loan balance, you would still not be able to pay it off completely.
Common issues caused by negative equity
If you get your loan paid for as arranged, then you shouldn’t encounter such issues as negative equity. Most of the time, negative equity can become a problem when there are sudden changes to your financial circumstances which may prevent you from getting your car’s loan repayments done on time.
For instance, you might find yourself suddenly jobless which will leave not having any capability to pay for the loan repayments anymore. You can then just choose to sell your car or vans but since the vehicle will have a value that is less than what you actually owe. As a result, you will not be able to pay off the entire car’s debt because there won’t be enough to cover the figures involved.
If you end up defaulting on your debt, certain fees will apply to that which will cause the amount you owe to increase even further. This will then result in your credit score getting negatively impacted and from there, things can just go a downward spiral if you’re not careful.
Minimising the possibility of negative equity
It would be to your advantage to work towards minimising the possibility of getting negative equity. However, it is easier said than done. There are many times when it may even be unavoidable. Until you have successfully paid back about two-thirds of the total loan amount, then you may have to deal with negative equity. The reason for this is depreciation, cars or vans depreciate at such a speedy rate or fees that even the moment you drive it out of a dealership means that its depreciation starts.
It is always best advice that you will set aside extra money every month to ensure that after you have paid your loan repayments, there will still be enough left to cover other monthly additional expenses.
You may also use short-term loan offers by a lender to avoid getting negative equity.
While this means that you will have to pay for a higher monthly payment early as a result but if you ever encounter some financial issues in the future, you can at least be sure that you won’t likely have to deal with negative equity.
You may choose for a larger deposit and early monthly payments as well. If you have the means to do it, it is always advised to make much larger deposits or payments. With this, you will only need to borrow a much smaller or limited amount from a lender which means that there will be less for you to repay.
Smaller loans will also lead to lower interest rates. This is why your goal when taking out a loan is to sign out for the smallest amount possible.
Also, if you still can, it wouldn’t hurt to stick with the current car you have until such time as it can hold out. Avoiding getting a new one too early, especially if you are still paying for the loan ensures that you can avoid negative equity.
If you can still help it, avoid changing your car just yet. The reason for this is because selling your car or used cars before paying off the loan, there is a very high possibility of negative equity.
Understand the risks before signing up for car finance
If you’re pondering the idea of securing car financing, make sure to carefully consider the decision, advice and offers.
In fact this is something you need to do for every type of loan you wish to sign up and search for.
Always understand the potential risks involved with negative equity finance. Being fully informed is always the way to go to ensure you’re making the right decisions.
Most of all, make sure that you will only sign up for car financing or any financing expert for that matter if you are sure that you have the means to pay it back.