What Is Positive Equity? What Do You Need To Know About It?
Positive Equity is a term that is used in relation to assets that you own, and which are financed by loans. It is most commonly used in relation to real estate investments but there are other assets wherein it can be a consideration. Positive equity can be a part of your overall net worth. Positive equity is when the value of the asset is more than the outstanding loan amount on it. Equity and collateral are often looked at by online loan lenders or any lender before you can get a loan.
Source of Positive Equity
Equity can be positive in many cases. If you put money as down payment, some of it or at least a part will give you positive equity. As equity is the difference between the actual asset value and the outstanding loan amount if the value of the asset increases then the positive equity grows. The major source of home equity is appreciation in the value of the house. Equity in a car is different compared to a home as a car’s value depreciates over time. Hence, the best way to have positive equity is to pay off the loan faster.
Equity and Loans
In order to understand how equity works in different types of loans, we share a few examples.
Asset Secured Loan
An asset secured loan is when you take out a loan for a purchase and you secure it with an asset. The asset is the collateral that you will lose in case of non-repayment of the loan. For home and car loans, the car or home itself is the collateral, but in other cases, you offer your car or some asset of value as collateral. This type of loan can be taken out for any purpose as long as you have the collateral. The relation between the loan balance and the asset’s value will define the equity. If the asset value is higher than the loan amount the equity is positive, but if it is the other way around, the equity is negative. Negative equity is a sign of serious financial risk or problem.
Financed Asset Type Loan
This type of loan is when you are buying a particular asset by taking out a loan and the purchase is the collateral. If you take out a car loan, to buy a car, the car you are buying is the collateral automatically. The same applies if you are buying land or a house too. The equity of your asset depends on the value and the loan balance. So, at the time of purchase, the equity will be the amount of down payment made by you.
Positive equity is a part of your net worth. It is the cash that would go in your pocket if you were to sell your asset and pay off the loan. Positive equity means less financial risk and it will allow you to make changes to your financial situation easily. Home equity can allow you to refinance your home at a lower rate or sell it and use the equity as a down payment on a new home. In order to decide if you want to take out a loan and the best source for borrowing, you can easily search for best online lenders and make your decision Click Here.