In the example where Alice borrowed €250,000, the outstanding balance is €225,000 and the market value is €175,000. What is her negative equity?

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Enhance your understanding of financial advising with the Qualified Financial Adviser (QFA) Loans Exam 1 Test. Prepare with detailed questions, hints, and explanations to ace your exam!

Multiple Choice

In the example where Alice borrowed €250,000, the outstanding balance is €225,000 and the market value is €175,000. What is her negative equity?

Explanation:
Negative equity happens when what you owe on a loan is more than what the property is worth. Here, the outstanding loan balance is 225,000 euros and the market value is 175,000 euros. The shortfall is 225,000 minus 175,000, which equals 50,000 euros. So the negative equity is 50,000 euros. This means if Alice sold the property at its current value, she would still need 50,000 euros to pay off the loan. The calculation uses the current outstanding balance, not the original loan amount, which is why the result is 50,000 rather than other figures.

Negative equity happens when what you owe on a loan is more than what the property is worth. Here, the outstanding loan balance is 225,000 euros and the market value is 175,000 euros. The shortfall is 225,000 minus 175,000, which equals 50,000 euros. So the negative equity is 50,000 euros. This means if Alice sold the property at its current value, she would still need 50,000 euros to pay off the loan. The calculation uses the current outstanding balance, not the original loan amount, which is why the result is 50,000 rather than other figures.

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