In car finance, equity refers to the difference between the value of a vehicle and the amount left on the car finance agreement.
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 several 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 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.