Swapping cars with negative equity on loan

Is it possible to change cars when the value is less than the remaining loan balance? It is a possibility for many as long as they are within certain limits.

What is negative equity

A negative equity situation exists when a borrower owes more on a car than it is actually worth. There are many factors that can contribute to negative equity.

• Some cars experience higher depreciation than others, which causes their values to plummet faster.
• Drivers with longer commutes may put higher mileage on their cars than the average driver.
• Some models may be less in demand from other buyers, which diminishes their value.
• Excessive wear and tear can lower a car’s price. Other issues such as fading paint can cause the value to drop faster.

How to handle negative equity

A car owner that wants to sell a vehicle must satisfy the loan. The bank or financing company holding the loan can supply a settlement figure that shows the amount that must be repaid if the car is to be sold on a certain day.

While positive equity may be used to shore up a bank account or as a deposit down on the next vehicle, not every car owner has this luxury. When the transaction involves negative equity, cash must be brought to the table to settle the balance. There are options for this process.

1. Obviously an owner can pay the difference with spare cash and close the loan out. For everyone else, this is not an option.
2. Negative equity can be rolled into a top-up loan. These products are generally for £3,000 or less, though some firms may approve higher amounts for those with excellent credit and high income.

Top-up loans can be structured in a way that borrowers can afford to make this payment along with their new car payment. Terms can be flexible, though they tend to favour an instalment arrangement of no greater than three years.

Private sales can be complicated, since it is the seller’s responsibility to make all of the arrangements to close out the old balance. Buyers will conduct a finance check to ensure that any existing financing has been fully cleared. Cars cannot be sold until the balance has been fully satisfied.

Enquiries may be made to a seller’s current finance firm or to solicitors that specialise in clearing negative equity through supplemental loan products. The advantage is that it allows for an owner to swap cars to meet changing income or life needs, such as to meet the needs of a growing family or disability.