Negative equity
When you owe more on your car loan than the car is worth. It is common early in a loan or with long terms and no deposit.
Negative equity means the balance left on your loan is higher than the car's current value. If you owe 15,000 dollars but the car is worth 11,000, you are 4,000 in negative equity. It is sometimes called being upside down on the loan.
It happens because cars lose value quickly, especially in the first year or two, while the loan balance drops more slowly. Long loan terms, no deposit, and high interest all make it more likely.
Negative equity matters if you want to sell or trade the car, or if it is written off, because you would still owe the shortfall. It can also make refinancing harder.
How it happens in New Zealand
- Depreciation. A 2016 Sorted article gave a rough example of a $20,000 car being worth around $7,800 after five years.
- Long terms. Stretching a loan lowers the payment but slows the pace the balance comes down, so you stay behind the car's value for longer.
- Little or no deposit. You start the loan already owing close to the full price, plus fees.
- Add-ons financed in. Mechanical breakdown insurance, GAP or maintenance packages added to the loan raise the balance but add nothing to the car's resale value. Consumer NZ says these often are not good value.
- Balloon payments. A balloon payment keeps repayments low by leaving a large lump sum at the end, so the balance stays high.
- Rolled-over loans. If you trade in a car you still owe on and the shortfall is added to the next loan, you start the new loan already upside down.
A worked example
This is a round, made-up example to show the maths, not a quote. You buy a car for $18,000 with no deposit and borrow $18,000 over seven years. After two years you still owe about $14,000 but the car is worth about $11,000. You are about $3,000 in negative equity. If you now trade it in on a $20,000 car and roll the $3,000 into the new loan, you borrow $23,000 for a car worth $20,000, and you start the new loan $3,000 behind.
What to do about it
- Keep the car and keep paying. Negative equity is only a problem if you have to sell, so if the car still suits you, time is on your side.
- Pay the balance down sooner. Even small extra payments reduce the gap. Check any early repayment fee first. Our early repayment page explains how.
- Avoid rolling it over. Carrying the shortfall into a new loan grows the problem. If you must change cars, pay the gap in cash or choose a cheaper car.
- Ask about hardship help. If repayments are too tight, ask your lender about a longer term, payment holiday or interest-only period before you miss a payment.
- Get free advice. A MoneyTalks adviser can look at your budget at no cost.
If the car is repossessed
Negative equity bites hardest here. Consumer Protection says that if a repossessed car sells for less than you owe, you still owe the difference. The old Credit (Repossession) Act 1997 was repealed in 2015 and its rules now sit in Part 3A of the CCCFA. A lender must send a warning notice at least 15 days before it can repossess, and the notice includes an estimated value, which can be well below what you owe. You can get an independent valuation and introduce a buyer. Within seven days of the sale the lender must tell you the sale price, costs and any shortfall, and cannot add more interest or penalties afterwards. Returning the car voluntarily still leaves the debt, but without penalty interest or repossession costs. See car finance after repossession for what comes next.
You can reduce the risk with a deposit, a sensible term, and a car that holds its value. We help you find a loan that fits. Nobody can promise approval, since lenders decide case by case, but you can check your options with one soft credit check. Then get your fair rate.
Not sure what you owe versus what the car is worth? Start with a soft credit check.
Sources
- Consumer Protection NZ: Loan for your car (repossession and shortfall)
- Consumer Protection NZ: Credit Contracts and Consumer Finance Act
- Consumer NZ: Finance at car yards
- Sorted: Cars and cash
- Credit (Repossession) Act 1997 (repealed 2015)
- Credit Contracts and Consumer Finance Act 2003, Part 3A (repossession)
- FMA: CCCFA Repossession Guidelines
- MoneyTalks (FinCap)
Common questions
Do I still owe money if my car is repossessed and sold for less than the loan?
Yes. Consumer Protection NZ says if the sale does not cover the debt, you still owe the difference. The lender must tell you the sale price, costs and shortfall within seven days of the sale and cannot add more interest or penalties afterwards.
Is rolling negative equity into a new loan a good idea?
Usually it makes things worse, because you borrow more than the new car is worth and start behind. Paying the gap down first, keeping the car, or choosing a cheaper car are safer options.
Can I hand the car back to avoid repossession?
You can return the car voluntarily, but Consumer Protection NZ says you still owe the debt. It will not include penalty interest or repossession costs, though, so talk to the lender early.
Is the Credit (Repossession) Act 1997 still in force?
No. It was repealed on 6 June 2015, and repossession rules are now in Part 3A of the CCCFA.
See your repayments, then get a fair rate.
One application, one soft credit check, no obligation. We match you to the lender most likely to give you a fair go.