Negative equity occurs when the value of an asset, typically a property or vehicle, falls below the outstanding amount owed on the loan used to finance it.
In other words, the borrower owes more than the asset is worth. This situation is common in real estate when property values decline, or when a car’s value depreciates faster than the loan balance is paid down.
Negative equity can be problematic, as it limits the ability to sell the asset or refinance the loan without incurring a loss. It also increases financial risk, especially if the borrower faces unexpected financial challenges.