What Is Negative Equity on PCP?

The essentials in plain English

Personal Contract Purchase is popular in the UK because the monthly payments are low and the choice at the end feels flexible. Yet those same features make negative equity more likely. Negative equity on PCP simply means you owe more on the finance than the car is currently worth. Cars typically fall in value fastest in the first years, while PCP payments mainly cover that expected depreciation and interest, not the full price of the vehicle. The result is that many drivers are in negative equity for roughly the first half of the agreement.

At the end of a PCP, you either pay the balloon - the Guaranteed Future Value - to own the car, part-exchange, or hand it back. If you hand it back and the market has slumped below the GFV, the finance company takes the hit, not you. That protection is a major advantage over a straightforward loan. The catch is earlier moves are different. If you want to change car mid-term or settle early, the real market value matters. If it has dropped hard, you may face a shortfall to clear before you can switch.

Understanding these dynamics helps you avoid surprises. The Consumer Credit Act also gives you a safety valve. Once you have paid 50 percent of the total amount payable on a PCP or HP - including the deposit and fees - you can voluntarily terminate and return the car with nothing more to pay, even if you are deep in negative equity. Used well, these rules can keep your finances resilient when life changes.

Negative equity is common on PCP - not a mistake. The skill is managing it.

Who will find this guide useful

If you have a PCP or are considering one, this guide explains how negative equity works in real terms so you can plan exits confidently. It is equally relevant if you are comparing PCP with Hire Purchase or leasing and want to minimise risk, or if you are thinking about swapping your car before the agreement ends. We also cover options for rolling negative equity into a new deal, and what that means for affordability. If your circumstances have changed and you need to reduce outgoings, the sections on voluntary termination and eligibility are particularly important.

Your practical choices

1. Pay the shortfall and keep or sell the car - clear title and simpler decisions later.

2. Part-exchange and roll any negative equity into a new PCP or HP - higher debt and repayments.

3. Voluntary termination after paying 50 percent of the total amount payable - return the car and walk away.

4. Keep the agreement to term and hand the car back using the GFV - capped liability at handback.

5. Refinance the balloon or switch to HP to own sooner - increases monthly cost, reduces equity risk.

6. Adjust behaviour - larger deposit, higher monthly payments, shorter term, lower mileage to curb depreciation.

Cost, impact, returns and risks compared

Who qualifies and when it matters

Negative equity can affect almost any PCP customer in the UK, especially within the first half of the term when depreciation outpaces repayments. If you intend to change car early, drive high mileage, or finance models that fall quickly in value, plan for a potential shortfall. The 50 percent voluntary termination right applies to regulated PCP and HP agreements governed by the Consumer Credit Act. Your deposit counts toward the threshold, as do any fees included in the total amount payable. If you reach that figure, you can hand back the car without further payments, even in negative equity. You must keep the car in reasonable condition for its age and mileage.

If you are exploring a replacement vehicle while in negative equity, a part-exchange can wrap the shortfall into a new PCP or HP, though lenders may price for risk and you could face a higher APR. Some specialist brokers and lenders consider applications where negative equity is present, but affordability checks remain strict. Kandoo works with a panel of lenders, which can help compare offers and understand whether settling, rolling over, or switching product type best supports your budget and goals.

Step-by-step to handle a shortfall

1. Check settlement figure from your finance company.

2. Obtain realistic trade-in and private sale valuations.

3. Compare value with settlement to size the shortfall.

4. Review affordability for pay-now versus roll-over options.

5. Confirm your 50 percent point and VT eligibility date.

6. Factor mileage, damage and potential charges.

7. Compare PCP, HP and refinance quotes side by side.

8. Decide and document - keep, settle, VT or switch.

Upsides and downsides at a glance

Watchpoints before you commit

Read your finance agreement carefully, paying attention to mileage limits, excess wear definitions, early settlement fees and how the GFV is set. If you expect high mileage or fast-changing needs, a shorter term or HP can reduce the negative equity window by paying down more of the principal sooner. Avoid rolling shortfalls into new deals repeatedly as it compounds interest and reduces future options. If you are close to the 50 percent point, calculate whether waiting a little longer lets you voluntarily terminate cleanly. Finally, get like-for-like valuations - trade-in, car-buying sites and private sale - so you know the true gap between market value and your settlement figure before making any move.

Alternatives to consider

1. Hire Purchase - higher monthly payments, faster equity, ownership at term end.

2. Personal Contract Hire - fixed-term leasing, usually no VT right, return only.

3. Personal loan or credit union finance - own outright, no GFV, market risk sits with you.

4. Keep the car longer - avoid frequent depreciation hits and finance resets.

5. Downsize or switch fuel type - reduce purchase price and running costs to limit risk.

Frequently asked questions

Q: What exactly is negative equity on a PCP? A: It is when your settlement figure is higher than the car’s current market value, often in the first half of the agreement when depreciation is steep.

Q: Does the GFV protect me from negative equity? A: At term end, yes. If you hand the car back and it is worth less than the GFV, the finance company absorbs that difference. Earlier exits are not protected.

Q: Can I get out early if I cannot afford payments? A: If you have paid 50 percent of the total amount payable, you can voluntarily terminate and return the car with no further instalments, subject to fair condition.

Q: Is HP safer than PCP for equity? A: Generally yes. HP payments reduce the balance faster and there is no balloon, which shortens the period you are in negative equity. Monthly costs are usually higher.

Q: Can I roll negative equity into a new deal? A: Many dealers and lenders allow it, but it increases your debt and may raise the APR. Compare offers and consider paying part of the shortfall in cash to limit costs.

Q: How do excess mileage and damage affect me? A: On PCP handback, excess mileage and damage can trigger charges. They do not create negative equity, but they add separate costs you need to budget for.

How Kandoo can help

Kandoo is a UK-based retail finance broker that works with a broad panel of lenders. We help you compare PCP, HP and personal loan options, estimate potential shortfalls, and understand the trade-offs between rolling over, settling or switching product. Our goal is to match you with transparent, affordable finance so you can drive with confidence and avoid costly surprises.

Important information

This guide is for general information only and is not personalised financial advice. Finance is subject to status, affordability checks and lender criteria. Early settlement figures, fees and eligibility vary by provider. Always read your agreement and consider independent advice if you are unsure about your options.