Car finance can already be quite a complex matter and so it's important that you have a basic understanding of what it involves before committing to a finance agreement.
One of the most valuable parts of a car finance deal is the equity position as it can open up many new opportunities for you in the future.
If you would like to see your car's equity position for yourself, sign up for Car Credible for free. Simply enter your vehicle reg, mileage, finance details, and your name and email address to gain exclusive access to your own personalised dashboard to help you stay on top of your car finance.
Just like any type of finance agreement, such as a mortgage, the equity position in car finance is the difference between what your car is worth and the outstanding finance you still owe on the car.
When you first take out the deal, the total amount you owe the finance company will include the amount you're borrowing, any interest incurred, and any additional fees due.
What are positive and negative equity in car finance?
Equity can be positive or negative. If your car is worth more than what you owe, you are in a positive position. On the flip side, if your car is worth less than what you owe, you are in a negative position.
Here is a very basic example: if your car is worth £10,000 and you still owe the finance company £7,500, then you have £2,500 of positive equity.
However, if your car is worth £10,000 but you still owe the finance company £12,500, you have £2,500 of negative equity, and you have to pay that sum to clear the debt.
Cars begin to depreciate in value the moment they are driven off of the forecourt of the dealership and so you will immediately be in negative equity.
As you make your monthly repayments, your car's value will start to slowly become more than what you still owe the finance company and that's when you get into a positive position.
There are many perks of being in a positive position but the main one is you could get out of your car finance deal before you've paid off the full loan.
This is due to your car being valued higher than what you owe, so, therefore, you can hand your car back and essentially pay it all off and more, giving you the opportunity to get a new car, using the positive equity in your old car as a deposit for the new one.
Of course, this is all subject to what the finance company and dealer say, and they will likely be in touch to give you information and offers.