Refinancing a Car with Negative Equity

Alisa Dan

16 October 2025

Key Takeaways

• Refinancing with negative equity is possible – some lenders may offer refinancing options, though you'll likely need to roll the negative equity into your new loan, resulting in higher monthly payments.
• Making additional payments is the quickest fix – paying extra towards your principal balance each month helps you reach positive equity faster and reduces total interest costs.
• Multiple strategies exist to manage negative equity – from refinancing and making extra payments to trading down to a less expensive vehicle or selling privately.
• Prevention starts with a substantial deposit – putting down 10-20% when purchasing reduces the risk of negative equity from the outset.
• Shorter loan terms protect against depreciation – whilst monthly payments are higher, you'll build equity faster than the vehicle depreciates.

Negative equity on car finance occurs when you owe more on your vehicle loan than the car is currently worth. It's a common situation that affects thousands of UK motorists, particularly in the first few years of ownership when depreciation is most rapid. Whilst refinancing with negative equity presents challenges, it's absolutely possible with the right approach.

What Is Negative Equity in Car Finance?

Negative equity happens when your outstanding loan balance exceeds your car's current market value. For instance, if you owe £12,000 on your finance agreement but your car is only worth £9,000, you've got £3,000 in negative equity. This gap between what you owe and what your car's worth can complicate refinancing, selling, or trading in your vehicle.

Several factors contribute to negative equity, with rapid depreciation hitting hardest in the first three years. New cars typically lose up to 60% of their value during this period. Long loan terms mean your payments don't keep pace with depreciation, whilst high interest rates result in more money going towards interest rather than reducing the principal.

Rolling over debt from a previous vehicle starts your new agreement already in negative equity. The Financial Conduct Authority has recently heightened scrutiny of motor finance agreements, particularly around commission arrangements.¹ This regulatory focus means lenders are more cautious but also more transparent about the true costs of car finance.

Can You Refinance a Car Loan with Negative Equity?

Yes, refinancing a car with negative equity is possible, though it requires careful consideration. Some lenders will refinance your existing agreement, but you'll need to roll the negative equity amount into your new loan. This means you're borrowing more than your car is worth, which typically results in higher monthly payments.

Lenders assess several factors when considering refinancing applications with negative equity. Your credit score plays a crucial role – a stronger credit profile since your original loan can help secure better terms. Your current income and employment stability demonstrate your ability to manage higher payments.

The amount of negative equity matters significantly when refinancing. Smaller gaps are easier to refinance than substantial ones. Before refinancing, compare offers carefully and calculate the total cost including all interest over the life of the loan.

Some refinancing deals might lower monthly payments but extend your term significantly, costing you more overall. According to FCA guidelines published in 2021, lenders must now provide clearer information about commission arrangements and total costs.² This helps you make more informed decisions when comparing refinancing options.

How to Get Rid of Negative Equity on Your Car

The most straightforward solution is making extra payments towards your loan's principal balance. Even an additional £50-100 monthly can significantly reduce your negative equity over time. These extra payments directly reduce what you owe whilst your car's depreciation naturally slows after the initial years.

Refinancing to a lower interest rate helps too, though this works best if your credit score has improved since your original agreement. A better interest rate means more of each payment goes towards the principal rather than interest costs. However, be wary of extending your loan term just to lower monthly payments.

Another option is selling your car privately rather than trading it in at a dealership. Private sales typically fetch higher prices than trade-in values. You'll need to cover the difference between the sale price and your outstanding balance, but this approach can minimise your losses.

Alternatively, consider trading down to a less expensive vehicle. The negative equity rolls into the new loan, but choosing a cheaper car reduces your overall debt burden. This strategy works best when the price difference between vehicles is substantial.

How to Deal with Negative Equity on a Car

If you're stuck with negative equity, don't panic – several management strategies can help. The simplest approach is keeping your current vehicle until you've paid off enough to reach positive equity. This might not be glamorous, but it avoids the complications and costs of trying to switch vehicles whilst underwater.

For those needing to change vehicles, rolling negative equity into a new agreement is an option, though it increases your total debt. Some dealers actively work with customers in negative equity situations. However, be cautious – this strategy can create a cycle where you're perpetually in negative equity on successive vehicles.

If you're struggling with payments, contact your lender immediately. Following the FCA's 2024 motor finance review findings, lenders must treat customers fairly and consider alternative repayment arrangements.³ They might offer temporary payment holidays, extended terms, or other modifications to help you through difficult periods.

Best Ways to Fix Negative Equity in a Car

The "best" approach depends entirely on your circumstances, but making additional principal payments consistently delivers the most reliable results. This strategy reduces your debt faster than depreciation erodes your car's value. Eventually, you'll flip into positive equity.

Combine multiple strategies for optimal results. Make extra payments whilst maintaining your vehicle well to preserve its value. Avoid excessive mileage, keep up with servicing, and address any cosmetic or mechanical issues promptly.

A well-maintained car depreciates more slowly and commands better resale prices. Consider Gap insurance if you're concerned about total loss scenarios. Guaranteed Asset Protection insurance covers the gap between your car's insurance payout and your outstanding loan balance if your vehicle is written off or stolen.

Comparison: Solutions for Negative Equity Management

Tips to Prevent Negative Equity

Prevention is invariably easier than cure when it comes to negative equity. Start by making a substantial deposit of at least 10-20% when purchasing your vehicle. This reduces your initial loan amount and provides a cushion against depreciation.

Choose shorter loan terms whenever financially viable. Whilst 60-84 month terms offer lower monthly payments, they keep you underwater longer. A 36-48 month term means you build equity faster than the car depreciates.

Research your vehicle's expected depreciation rate before purchasing. Some models hold their value remarkably well, whilst others drop precipitously. Choosing a car with strong residual values naturally protects against negative equity.

Avoid rolling over negative equity from previous vehicles if at all possible. This practice starts your new agreement already underwater, making it extremely difficult to reach positive equity. If you're in negative equity on your current car, try to clear it before purchasing your next vehicle.