negative equity
When the value of an asset is less than the debt secured against it.
Example
“Negative equity in the car meant trading it in would still leave $4,000 owed on the old loan.”
Memory Tip
NEGATIVE — the math is backwards. The asset is worth less than you owe.
Why It Matters
Negative equity affects your financial flexibility and ability to refinance or sell an asset. If you ever need to sell the asset, you will owe money out of pocket since the sale proceeds will not cover your debt obligation.
Common Misconception
Many people think negative equity only happens in real estate, but it can occur with any asset financed with debt, including vehicles, equipment, or other collateral. The principle applies wherever you borrow more than an asset is worth.
In Practice
Suppose you purchase a car for 30,000 dollars with a loan of 28,000 dollars, but the car depreciates to 25,000 dollars within the first year. You now have negative equity of 3,000 dollars because you owe 28,000 dollars on an asset worth only 25,000 dollars, creating an underwater loan position.
Etymology
From Latin 'aequitas' meaning equal — there is no equity when debt exceeds value.
Common Misspellings
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