Negative Equity on a PCP: How to Get Out, and Which Way Is Cheapest

You've checked the numbers and your car is worth less than it would cost to pay off the finance. That's negative equity, and it's the position most PCP drivers are in for most of their contract.

It doesn't mean you're trapped. There are four ways out, and the cheapest one depends on a single comparison: the size of your equity gap versus what it would cost to reach the 50% point for Voluntary Termination. This guide shows you how to work out both.

Am I in negative equity?

You're in negative equity when:

Your car's value − your settlement figure = a negative number

For example, a car worth £16,700 with a settlement figure of £18,560 is in £1,860 of negative equity. If you sold it today, the sale wouldn't cover the finance and you'd need to pay the £1,860 difference yourself.

To check yours:

1. Settlement figure: from your lender's online account or by phone. See how settlement figures are worked out.
2. Car's value: a We Buy Any Car or Motorway valuation. Use what someone would actually pay you, not the dealer forecourt price.

Or put your contract details and car's value into our free PCP equity calculator. It shows your equity position next to how far you are from the 50% point, so you can make the comparison below in one go.

Is negative equity normal on a PCP?

Yes. A new car typically loses 15 to 25% of its value in the first year, while your early monthly payments go largely on interest. So the car's value falls faster than your settlement figure does.

As the contract goes on, the gap usually narrows. The optional final payment (the GMFV, or balloon) is set at a level the lender expects the car to be worth at least that much at the end, so many PCPs reach neutral or positive equity in the last year. Our PCP equity guide shows a typical timeline.

So if you don't need to leave early, the simplest fix for negative equity is often just to keep paying. The rest of this guide is for when you do need to leave.

Your 4 ways out

1. Keep paying and wait Costs nothing extra. The gap usually shrinks month by month. Not an option if you can't afford the payments, or your circumstances have changed.

2. Sell the car and pay the gap You can't sell a car you don't yet own, but most buying services and dealers will settle your finance directly with the lender as part of the sale. You pay them the shortfall (your negative equity), and you walk away with no car and no finance. Cost: the equity gap.

3. Voluntary Termination (VT) Under Section 99 of the Consumer Credit Act, you can hand the car back once you've paid 50% of the total amount payable (deposit, all monthly payments and the final payment added together). Your equity position doesn't matter: the lender takes the car and the negative equity with it. If you're below 50%, you can still VT, but you pay the difference to reach the halfway mark first. Cost: the top-up to 50%, which is £0 once you've passed it. Damage beyond fair wear and tear, and any excess mileage charge in your agreement, can still apply. Our Voluntary Termination guide covers the details.

4. Part-exchange into another car A dealer settles your finance and adds the shortfall to your next finance deal. No cash needed today, but you start the new contract already in negative equity. More on this below.

Which is cheapest? A worked example

For most people it comes down to option 2 (sell and pay the gap) versus option 3 (top up to 50% and hand it back). Whichever number is smaller is usually the cheaper exit.

Here's the same example PCP we use across our guides: a £25,000 car, £2,500 deposit, 47 monthly payments of £382.25 at 9.9% APR and an £11,000 final payment. The total amount payable is £31,466, so the 50% point is £15,733.

"Pay to sell" is the equity gap: settlement figure minus the car's value, using illustrative trade-in values (for example £16,703 against a £18,560 settlement at month 18). "Pay to VT" is the top-up needed to reach 50%. Settlement figures are estimates and don't include the extra days of interest lenders can add.

Two things stand out:

• Early on, selling usually wins. The top-up to reach 50% is large in the first two years, often several times the equity gap.
• Once you pass 50%, VT is free. You owe nothing more on the finance, however big the gap. In this example that happens around month 35.

The balance flips the other way when a car loses value faster than expected, for example some EVs and premium models. Say this car was only worth £12,000 at month 24. The gap would be £5,118, now bigger than the £4,059 top-up, so handing it back under VT would be about £1,000 cheaper than selling.

That's why it's worth running your own numbers rather than going by rules of thumb. In our calculator, add your car's value in the Equity box and it tells you which looks cheaper on your figures.

Before you decide, also factor in:

• Excess mileage and damage. These can be charged on a VT hand-back, but not if you sell. If you're well over your mileage, selling may come out ahead even when the top-up looks smaller.
• How you sell. A private sale or Motorway can beat We Buy Any Car by hundreds, which shrinks the gap.
• The exact settlement figure. Lenders can add up to 58 days of extra interest, so get a formal quote before committing.

Don't confuse VT with voluntary surrender

They sound similar, but they're very different:

• Voluntary Termination is a legal right under Section 99. Once you've paid 50%, you owe nothing more on the finance, and the account shows as closed on your credit file (as long as there are no arrears).
• Voluntary surrender is when you give the car back without using that right, usually because you're struggling with payments. The lender sells it, often at auction, and you still owe the difference between the sale price and what's left on the finance. It can also be recorded against your credit file.

If you've paid 50% or more, make clear in writing that you're exercising your right to Voluntary Termination under Section 99 of the Consumer Credit Act. If you're struggling with payments, talk to your lender early. You can also get free, impartial debt advice from MoneyHelper.

Rolling it into your next car

Part-exchanging in negative equity is common, and dealers make it easy. It means the shortfall is added to your next finance deal, so you pay interest on it and start that contract further underwater.

It can make sense for a small gap, if the new deal is genuinely good value. But repeated over two or three cars, it's how drivers end up owing thousands more than their car is worth with no clean way out.

If you go this route, ask the dealer to show you exactly how much negative equity is being added to the new agreement and what it costs over the term.

What if the car is written off?

Your insurer pays the car's market value, not your settlement figure. If you're in negative equity, that payout won't clear the finance, and you're left paying the difference for a car you no longer have.

GAP insurance covers this shortfall. It's optional and you can buy it from independent providers as well as the dealer, often for much less. It's worth considering in the first couple of years, when negative equity is usually at its deepest.

The short version

1. Negative equity on a PCP is normal, especially in the first two years
2. If you don't need to leave, keeping going usually shrinks it
3. To leave, compare your equity gap with your top-up to 50%: the smaller one is usually the cheaper exit
4. Once you've passed 50%, Voluntary Termination lets you hand the car back owing nothing more on the finance
5. Be careful rolling negative equity into your next car
6. Check your numbers in the free calculator, or track them every month in EquityGo on Android

General information, not financial advice. Check your exact figures with your lender before making a decision.