Negative Equity Car Loan

Need a car loan but have negative equity? Don’t worry – you can find cost-effective finance solutions.

No obligation. It won't affect your credit score.
Written by 
Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
Our authors
, updated on July 5th, 2023       

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

Vehicles are one of the most practical purchases we ever make. They’re essential for so many of the things we do day-to-day. Negative equity is perhaps more common than you might think, so it’s not unusual for vehicle owners to find themselves with a car finance shortfall. Read on to discover your options from some of Australia’s top vehicle finance lenders.

What is car loan negative equity and how does it happen?

Negative equity on a car loan is when you owe more to the car finance lender than what your vehicle is currently worth. The first thing to note about negative equity is that you didn’t necessarily make a bad car loan decision: vehicles typically lose 20% of their value during their first year on the road. Couple that with a long-term finance deal and you have the makings of a shortfall in value.

Negative equity is really only an immediate problem if you want finance to upgrade your car. Depreciation slows down markedly after the first couple of years so, in many cases, negative equity either lessens or disappears entirely during the latter stages of a car loan. There are a few car loan factors that make negative equity more likely:

  1. Balloon payments: Using a balloon payment is a great way to manage the monthly costs of a car loan, but it can leave you more prone to negative equity. When you set a substantial residual or balloon amount, you essentially spend the term paying down less of the figure you borrowed. That means you owe more when the finance agreement ends.
  2. Zero deposit car loans: Using a deposit for a car loan comes with a couple of distinct advantages. Firstly, your repayments are lower, and you pay less interest during the course of the finance agreement. Secondly, you protect yourself against negative car loan equity because you start your repayments with some equity ‘in the bank.’ When you don’t use a deposit, you’re almost guaranteed to spend at least the first couple of years of your loan in the red because of the way your vehicle depreciates.
  3. Buying brand-new versus used cars: Of course, depreciation dictates that you’re more prone to negative car loan equity when you buy a new vehicle. As per the first two points, that risk is amplified the longer you borrow and the less deposit you use, and with the size of any balloon payment.

How does a negative equity car loan work and how can I apply?

Negative car loan equity can be an inconvenience, but it’s not insurmountable. Savvy partners with many specialist lenders who offer products designed to get you past the problem.

When you need to upgrade your car with negative equity, these lenders will agree to fund both the cost of clearing the shortfall and the purchase of a newer model, and you pay a single monthly repayment that covers both. Negative equity car loans typically allow for up to $8,000 difference between what you owe on your existing vehicle and what it’s currently worth.

Negative equity car loans otherwise work in the same way as standard vehicle finance. You borrow an agreed amount and repay that with interest over a set period between one and seven years.

Applying for a negative equity car loan is pretty much the same as a standard car loan application. You’ll need to provide the lender with some documents, such as photo ID, proof of address, details about your current borrowing, paperwork for any assets you own, and access to your online bank statements.

Explained: Your negative equity car loan options

Top tips for avoiding negative car loan equity

Use a deposit if you can afford one

As we’ve learned, depreciation matters. The more you borrow, the likelier you are to experience negative car loan equity. That’s especially true if you plan on upgrading your car every couple of years, so use at least a 20% deposit whenever you can.

Pay it off quicker

If your budget allows, making larger repayments for a shorter period will protect you from negative car loan equity. Longer car loan terms mean you’re paying less of what you borrowed down each month.

Don’t overspend

Right from the get-go, spending more money than you can afford puts you at risk of negative car loan equity. You’ll be forced to pay off less of the loan during the crucial first couple of years. Buy within your means and stay on top of a shortfall more easily.

Consider a late model second-hand car

If you don’t have the means to use a deposit, you can bypass a lot of depreciation issues by buying a two-year-old vehicle, for instance. Remember that car warranties typically last between five and seven years, so you could pick up an absolute bargain this way.

Compare car loan interest rates

All lenders are different and the cost of various car loans can also vary significantly. It’s almost impossible to check every option out there, so enlisting the help of a Savvy broker can help you find a cost-effective deal. The less interest you pay, the quicker you reduce what you owe and the less likely you are to have a problem.

Find answers to your negative equity car loan questions here

How can I find out if I’ve got negative car loan equity?

If you’re asking yourself this question, chances are that you’re thinking about upgrading your current car. If that’s the case, you’ll need to compare the current value of your vehicle with what you still owe. You could do that by visiting a dealership and asking for a trade-in appraisal, seeking out an independent valuer or doing so online. After that, all you need to do is either check your car loan balance online or call up your lender and enquire. If your vehicle value is less than that balance, you have negative car loan equity.

What if my car is written off while I have negative equity on my loan?

Negative equity sometimes strikes because of a vehicle accident. Car buyers who drive the same car for several years sometimes pass through a period of shortfall without even noticing – but when your car gets written off, it can become an issue if you owe more on finance than the insurance company is prepared to pay out. You could avoid this by taking out gap insurance or by reviewing your comprehensive car insurance each year with an agreed value in line with your finance balance and not solely using a market value policy.

What if my situation changes while I have negative car loan equity?

Being in a position where you can no longer afford your existing loan and you have a finance shortfall isn’t great – if you’ve lost your job, for instance. Talk with your current loan provider as soon as you can and see if they’ll agree to adjust the terms of your finance. Lenders prefer to help where they can. Alternatively, if your situation changes for the better, you’ll be able to make extra repayments to pay off your loan more quickly, although you should look out for any potential fees related to doing so.

How long does it take to arrange a car loan?

Many borrowers receive their car loan funds within one or two working days, so the whole process from application to receiving funds is a very fast one.

Can I get a negative equity car loan from my bank?

Probably not – you might find that your bank is reluctant to provide funding beyond the value of your new car. It’s always best to check out as many lenders and products as possible before you commit, as you’re more likely to find suitable lenders based online that can help you out.

Can I cover drive-away costs with a negative equity car loan?

Yes – there are lenders who will consider applications for car loans where you include on-the-road costs like delivery fees, stamp duty, and even insurance.

Helpful guides on car loans

Car Loans Banner - Happy family playing outside in front of their car

The 5 Best Family Cars in Australia in 2024

Choosing the right car for your growing family can feel like navigating a maze of options. Safety, comfort, space, practicality and budget all play crucial roles in finding the perfect...

Car Loans Banner - Aerial view of red SUV using Autonomous Emergency Braking to avoid car crash

What is AEB in Cars?

Autonomous Emergency Braking (AEB) is a growing technological presence in modern cars. This system plays a crucial role in enhancing road safety by assisting the driver in potential collision scenarios....

Car Loans Banner - Young woman smiling while sitting at the wheel of a car

Refinancing a Car Loan with Bad Credit

There are many potential benefits for refinancing a car loan, from accessing better rates to adjusting your repayment terms. However, if you have bad credit, refinancing your car loan may...

Car battery being installed in car

How Long Does a Car Battery Last?

A battery is essential to your car’s functionality, providing the necessary power to start the engine, operate lights and accessories, and even power advanced features like navigation systems and entertainment...

Car Loans Banner - Young couple shaking hands with sales representative at a dealership after buying a new car

Novated Lease vs Car Loan

When it comes to financing a vehicle, you have several options available, each with its own set of benefits and considerations. Two of the most popular consumer car finance options...

Car Loans Banner - Dealership salesperson showing a tablet to woman in a car

EOFY Car Sales Guide 2024

The end of the financial year (commonly known as EOFY) is like Christmas for the car industry. You’ll see sales dominating your television and phone screens in the weeks leading...

Couple shake hands with dealer in car showroom

5 Questions to Ask at the Dealership

Stepping onto a car dealership lot can feel like navigating a maze. The array of vehicles, sales pitches and financing options can overwhelm even the most seasoned buyer. When purchasing...

Car Loans Banner - Young couple shaking hands with sales representative at a dealership after buying a new car

How Much Can I Borrow For a Car Loan?

Determining how much you can borrow for a car loan is based on how much you earn, how much you spend each month, and your credit habits. This calculation is...