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To better describe the concept of equity, we’ll use a car loan as an example. However, the concepts presented here apply to virtually anything purchased with loaned money or credit. Upon the initial purchase of a car, the bank holds the entire vehicle in a form of ownership because little or no money has been paid back. This balance of true ownership will begin to change as you pay back money, relieving your prior obligation and claiming your true ownership. This true ownership is one way of saying equity. A simple way to demonstrate this is if you buy a $1,000.00 vehicle and have paid three $100.00 payments, and from each payment the lender has extracted their lending fee in the form of interest, leaving $200.00 toward the vehicle’s ownership, then in a sense, you have transferred a balance of ownership. This new balance has given you $200.00 of equity in this vehicle. You now technically own $200.00 of this vehicle. As you might imagine, your equity will continue to increase and the balance of ownership will eventually outweigh the lender’s. Ultimately, the balance of ownership will be completely reversed, giving you $1,000.00 of equity in this vehicle.

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