Motorbike Finance: How To Navigate Negative Equity

Negative equity – or when your bike is worth less than you owe – is a tricky problem and one that can easily see you hitting financial difficulties if you don’t find a way to resolve it.  Here’s our guide to keeping the negative numbers at bay, and what to do it you do find the minus sign is affecting your finances.

What Is Negative Equity?

Simply put, negative equity is when the thing you own, in this case your bike, is worth less than the amount of credit you owe the lender.  This situation can potentially arise with any type of secured loan, from vehicle finance right through to large investments like mortgages.

Usually, you will be a position where your bike is worth more than the amount you owe. This is good, and leaves you with “equity” to use against a new bike, or to simply to pop back in your pocket. But if your bike is worth less than the amount you owe, you will not be able to clear the finances by simply using the proceeds of a sale alone.  This is “negative equity” and it can leave you seriously short of funds.

How Does Negative Equity Happen?

Your finance agreement will have been mapped out from the beginning, with the decrease in the bikes value take into account.  Most new vehicles lose value quicker than you can make repayments, but generally they even out in the end.   If, however, towards to end of your repayment term your bike is still not worth as much as the amount owed you potentially have a problem. Negative equity is particularly prevalent with PCP agreements where you only put down a small deposit, or if you took the agreement out over a longer term.

Why Is Negative Equity Such A Problem?

If you need to sell your bike prior to the end of the agreement, if your financial situation changes, for example, there may not be enough value in your motorbike to cover the outstanding finance.  In this situation, you will need to make up the shortfall yourself.

If we assume that you are selling your bike because you can’t afford to keep up with the monthly repayments, it’s highly likely that you won’t be able to make up the difference owed either.  Non-payment could result in debt collectors at your door and even county court judgements against you.  All of these outcomes will affect your credit rating making it much harder for you to obtain loans or finance in the future.  Situations like this can be the start of the steady spiral downwards towards bankruptcy.

Can You Carry Your Negative Equity Forward Onto A New Agreement?

No – well actually yes you can, as more and more lenders are allowing this to happen.  But it is not a financially sound idea and could potentially cost you many hundreds or even thousands of pounds more in the future. Worryingly, some dealerships will suggest that this is an excellent idea.  If your bike is not worth as much as you thought it was they can still sell you a new bike by simply adding the additional amount you owe to your new finance agreement.  They will tell you this is not a problem, but in reality, it can lead you into further debt.

Can You Minimise The Risk Of Negative Equity?

The best way to avoid getting into a negative equity situation is to buy using cash.  But, here in the real world, that is often simply not an option.  Most finance agreements, especially PCP, make it almost impossible to prevent against some periods of negative equity, but if you are savvy and prepared to go against the dealership at the point of sale, you may be able to limit the risks.  Try these top negative equity busting tips:

• Pay a larger deposit up front.
• Take shorter-term agreements.
• Keep your bike for as long as you can.
• Correctly estimate your annual mileage.
• Don’t pay for any extras you don’t want or need, like GAP insurance of service plans.
• Only buy what you can afford.  

If you are able to buy a sensible, practical and well-built machine that will last you for many years to come, you are already doing well to ameliorate the risks of negative equity.  Certain makes and models retain their values far better than others. Those with novelty value or a limited appeal are a liability from the outset.

Stay cautious and buy with your head, not your heart, to ensure years of trouble-free riding with no nasty surprises at the end of the payment term. If you do find yourself in financial difficulties, speak to your lender to see if they can help you in any way, and ask for help from agencies of charities that can help you with debt counselling and financial planning.