“Negative equity” is a term most commonly associated with the housing market, but can also apply to other financial situations such as car finance agreements. Falling into negative equity can have an unfavourable impact financially; for instance, negative equity could mean that you have to sell your home for less than you owe on the mortgage. But what impact does negative equity have on car finance agreements, and what does this mean for GAP insurance policies?
In this guide, we will explore negative equity and its impact on car finance agreements. We will also discuss whether or not GAP insurance covers negative equity, and which GAP insurance policies can be taken out for cars on PCP or Hire Purchase finance.
In general terms, negative equity describes the event in which an investment, such as a house, is worth less than its outstanding mortgage balance. This can make it harder to sell or re-mortgage; for instance, if a house was originally worth £180,000, but is now worth £120,000 and you still have £150,000 left to pay on the mortgage, you are in negative equity.
This occurrence doesn’t just apply to housing and mortgages; cars purchased using a personal car loan or PCP/Hire Purchase loan can also fall into negative equity.
Negative equity applies to cars on finance agreements when the outstanding balance owed to the finance company exceeds the current market value of the car. This can occur when the car loses value more quickly than the debt is being repaid, and could be due to higher than average miles on the clock, a repairable write off or other damage to the car. It is not uncommon for a car’s value to dip below what is owed on finance, but some contracts tend to balance this out so you can pay your loan back at a consistent rate.
If your car falls into negative equity, you have various options. If you are concerned about negative equity, you should get in touch with your vehicle finance company as soon as possible.
GAP (Guaranteed Asset Protection) insurance is incredibly useful, especially if your car is high in value and you would like to protect your investment in case the vehicle is declared a total loss. Without GAP coverage, if you find yourself in negative equity, your comprehensive car insurer will only pay out what the vehicle is currently worth, meaning you may still have some money to pay out to the finance company.
Thankfully, GAP insurance should generally cover negative equity caused by vehicle depreciation. This means that you won’t have to worry about paying your outstanding balance, as your GAP insurance company will handle this for you. However, some GAP insurance policies won’t cover a different type of negative equity; for instance, where a balance has been carried over from a previous finance agreement and added to a new agreement. The finance in this situation is not just for the replacement car and anything from the old agreement might not be covered. You should always contact your GAP insurance provider to see whether this type of negative equity is covered.
ALA policies do not cover negative equity where previous finance has been rolled into a new agreement. To discuss your policy with us, you can get in touch here.
If you recently purchased a car on finance, there are two distinct GAP insurance policies that could benefit you; Back to Invoice Plus (also known as Return to Invoice Plus) and Vehicle Replacement Plus. Back to Invoice Plus policies will pay the difference between the comprehensive motor insurer’s settlement and the original invoice price of the vehicle, or the outstanding finance balance, whichever is higher. The vehicle must be less than 10 years old and must have been purchased within the last 180 days. You can find out more about Back to Invoice Plus policies here.
Vehicle Replacement Plus is a great option if you wish to be able to replace your car with a similar version to the one you originally bought in the event of a total loss. This type of GAP insurance coverage will cover the financial shortfall between your car insurance company’s settlement and the replacement cost of your vehicle, or the outstanding balance on your finance agreement if this is higher at the time of claim. This way, you can retrieve the equivalent of a brand-new car without footing the bill if your cover was brand new originally. You can learn more about Vehicle Replacement Plus policies here.
Each GAP insurance policy here at ALA can be tailored to suit your preferences, with options to pay upfront or monthly in order to spread the cost. When building a quote, you can input your vehicle make and original invoice price in order to build a policy that works for you, as well as choose additional extras such as tyre and alloy wheel insurance. If you’re concerned about negative equity affecting your policy, you can get in touch with us to ask any questions and ease your worries.
To find out more, or to enquire about a quote, you can contact us on our website here.
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