Lesson 12 of 25 · 6 min
Negative equity, named
A sale at today's mark leaves a loan still standing, because the claim is larger than the collateral.
Negative equity, the amount by which the loan exceeds the mark, is LTV above 100 percent named as a leftover. Lesson 11 computed the months. This lesson names the month-12 leftover and shows what a sale at the mark does not do.
Use the month-12 book. The loan is $27,954.91 against a mark of $24,538.80. Negative equity is $27,954.91 − $24,538.80 = $3,416.11. LTV is 113.9 percent. A sale at the mark produces $24,538.80. That figure does not retire a $27,954.91 loan. After the sale, $3,416.11 of claim is still standing, with no car underneath it.
The leftover is not a fee and it is not a penalty. It is the arithmetic remainder of two schedules that have not yet crossed. Selling the car at the mark converts the collateral into cash and applies that cash to the loan. Whatever the loan still exceeds is now unsecured by that car. Track 1 lesson 6's ratio, once it is above 100 percent, is exactly this remainder waiting to be realized.
Lesson 13 is what happens when that remainder is not paid in cash but is written into the next principal. This lesson is only the naming. Negative equity is the gap. A sale at the mark does not close it.
Selling the collateral for its mark retires the mark. It does not retire a larger loan. The difference is the name of this lesson.
Key terms
- Negative equity
- Loan minus mark, when the loan is larger. LTV above 100 percent, stated in dollars.
- Sale at the mark
- Turning the car into cash at today's value. That cash is smaller than the loan whenever equity is negative.
- Leftover claim
- The loan that remains after the mark has been applied. It is no longer sitting on that car.
Worked example
The month-12 leftover, in one subtraction
Month-12 book from lesson 11. Loan $27,954.91. Mark $24,538.80.
- Loan
- $27,954.91
- Mark
- $24,538.80
- Negative equity
- $3,416.11
- LTV
- 113.9%
- What a sale at the mark retires
- $24,538.80
$27,954.91 − $24,538.80.
$27,954.91 ÷ $24,538.80.
Not the loan.
A sale at $24,538.80 leaves $3,416.11 of loan standing. Negative equity is that remainder, not a separate charge.
Check yourself
A loan of $16,480 sits against a mark of $14,220. What is negative equity, and what is LTV? What does a sale at the mark retire?
Negative equity is loan to value above 100 percent — the same ratio Track 1 lesson 6 computes on a pledged portfolio. Open Loan to value, and how to compute it →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.