Negative Equity

You have Equity when the current resale value of a purchased item is more than the remaining borrowed balance. The item is worth more than is owed – to get out of the loan: sell the item and pay off the loan, then keep the extra money. This is a good position to be in.

You have Negative Equity when the remaining balance owed on a purchased item is more than the current resale value. More is owed on the item than the item is currently worth – to get out of the loan: sell the item and pay down the loan, add more money to complete the loan payoff.

Using a significant down-payment can create equity with large purchases, and provide some protection against negative equity over time. Lenders sometimes insist on a down-payment.

Borrowing money to purchase a car can create a negative equity situation, especially when there’s no down-payment, a higher interest rate, and financed over a longer period of time. Gap insurance is sometimes available as part of an auto-insurance policy to cover the difference in value if the car gets totaled while in a negative equity situation.

The borrower is legally responsible for repaying an entire loan, even if the financed item quickly becomes worthless.