Equity

Meaning and Definition

Equity, in the context of car finance, refers to the difference between the current market value of a financed vehicle and the remaining amount owed on the loan or finance agreement. Positive equity occurs when the market value of the vehicle is higher than the outstanding loan balance, while negative equity (also known as being "upside-down" or "underwater") occurs when the loan balance exceeds the market value of the vehicle.

Why it is important to know

Understanding equity is important as it influences the financial position of the borrower and affects options such as selling or trading in the financed vehicle. Positive equity can provide opportunities to trade in the car or sell it and use the excess funds towards a new vehicle or other financial goals. On the other hand, negative equity may limit options and may require additional financial considerations when transitioning to a new vehicle.

Example in car finance

Suppose you have been making payments on your car finance agreement for several years, and during this time, the market value of the vehicle has increased. If the outstanding loan balance is £10,000, but the current market value of the car is £12,000, you have £2,000 in positive equity. This means you have additional value in the vehicle that could be used towards a trade-in, selling the car, or refinancing options. Conversely, negative equity would occur if the outstanding loan balance exceeded the market value of the vehicle.