In car finance terms, equity refers to the difference between the resale value of your vehicle and the outstanding finance owed to the lender.
If the value of the vehicle is greater than the amount owed, you have positive equity.
However, if the amount owed is more than the value of the car, this is referred to as Negative Equity.
If you wish to end your car finance agreement early, you’ll need pay a settlement figure calculated by the lender based on your outstanding finance.
If your car has positive equity (its Residual Value is higher than the settlement figure) you can use the proceeds from the sale to cover the settlement figure.
However, if your car has negative equity (its residual value is less than the settlement figure), you’ll need to pay the shortfall between the value of the car and the settlement figure.
PCP is a popular car finance choice with 3 options at the end of the agreement.
You can either; pay a Balloon Payment and keep the vehicle; exchange the vehicle for a newer model; or simply return it to the lender.
If you choose to exchange your car at the end of the agreement, and the resale value is greater than the GFV (the estimated end value of the car), you can use the positive equity towards your next finance deal.
For example, at the start of your agreement the lender calculates the GFV to be £6,000, based on the vehicle’s estimated Depreciation over the length of your contract.
However, the actual depreciation was slower than expected, and as a result your car is actually worth £7,000.
This means you have £1,000 in positive equity to use as a Deposit on your next finance agreement.
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