Equity Explained

In car finance, Equity refers to the difference between the value of a vehicle and the amount left on the car finance agreement. In the following guide we explain in more detail what is meant by the term Equity, and provide some handy resources to help you discover more about it.

Creditplus Definition of Equity

Equity refers to the difference between the car finance agreement and the value of the vehicle. For example, if your car is worth £5,000 and there is £3,000 left to pay on the car finance agreement, there is £2,000 equity left in the value of the vehicle. Equity is referred to as negative equity when the amount left on the car finance agreement is more than the value of the car. For example, if your car is worth £4,000 but there is £6,000 left to pay on the car finance agreement, there is £2,000 of negative equity.

There are a number of situations when the equity left in the value of your vehicle may become an important figure to note. If for any reason you need to settle your car finance agreement early, you may need to sell or part-exchange your car in order to pay the settlement figure (the amount of money still owed on the car finance agreement, plus any early settlement fees). If your car is worth more than the settlement figure, then you will be able to pay the figure using proceeds from the car with some equity left over. However, if your car is in negative equity (worth less than the settlement figure), you will still need to pay the remaining amount on the settlement figure.

If you choose to upgrade your car, you will also need to settle your current finance agreement early and take out a new agreement. With Creditplus, even if you took out your original finance policy with a different company, we are able to accept your vehicle in a part-exchange to settle your current finance and use any remaining equity as the deposit for your new finance agreement. If there is negative equity, Creditplus may be able to provide a top-up loan to run alongside your new car finance agreement to cover this amount, depending on your affordability and credit circumstances.

If you crash your car and there is still finance left to pay on the vehicle, you may be in negative equity if the amount that your insurance company pays out does not cover the amount left on the finance. Whilst you are able to continue to pay off the monthly repayments as per your car finance agreement, many people would rather choose to settle the finance early, thus allowing them to take out another car finance policy for a new vehicle. There are specific insurance products that are available when you take out car finance with Creditplus that can cover this cost such as GAP insurance and RTI insurance.

Wikipedia Definition of Equity

“In accounting and finance, equity is the residual claimant or interest of the most junior class of investors in assets, after all liabilities are paid; if liability exceeds assets, negative equity exists. In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in the assets of a company, spread among individual shareholders of common or preferred stock; a negative shareholders' equity is often referred to as a positive shareholders' deficit.”

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