Negative equity occurs when the value of an asset being financed is lower in value than the amount outstanding to be paid on the loan. In this guide, we’ll explain more about negative equity and what you need to know about it when it comes to car finance.
Negative equity is a phenomenon which is common in secured loans, and happens when the balance of the loan is worth more than the asset used to secure it. Equity refers to the difference between the amount being borrowed in the car finance agreement (usually including the total interest), and the value of the vehicle being financed.
When it comes to car finance, negative equity is a situation where the amount being paid for the loan exceeds the cost of the car. This can be down to a number of factors such as missed finance payments, market fluctuations affecting the interest rate, and depreciation. It is common with the purchase of car loans as automobiles tend to depreciate quickly, especially on new cars that can lose 20-30% of their value in the first few years.
Because news cars lose their value so quickly, you may want to finance the purchase of a nearly new or used car. Whilst they still lose value through depreciation, they will not have as dramatic a drop in value as a vehicle that has been driven straight off the main agent forecourt. There are also certain makes and models that are better at retaining value over time. If negative equity is a big concern, you may want to do some research into finding a car that meets your requirements and retains its value well.
It is always important to maintain your regular monthly payments and ensure that they are paid on time. If, for any reason, you find yourself in a position where you cannot meet your payments, you should speak to the lender as soon as possible. It’s better to work together to find a resolution as soon as possible.
"Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets (particularly real estate, whose loans are mortgages) with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down". It is also common for negative equity to occur when the value of a property drops shortly after its purchase. This occurs frequently in automobile loans, where the market value of a car might drop by 20-30% as soon as the car is driven off the lot."
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