What Does it Mean to Have Equity In Your Car?
When a buyer finances a car, they are borrowing money in the form of a loan to cover the cost of the vehicle. But what happens if the value of the car fluctuates as you pay off the loan? The difference in these two values is called the vehicle equity.
Equity on a car loan can be either positive or negative.
- Positive equity is when the value of your vehicle is more than the amount owed. This means that if you were to sell or trade in your vehicle, there could be value put towards paying off your new auto loan.
- Negative equity is when you owe more than the car is worth. In this case, you’d need to either pay off or roll over that difference when selling the vehicle or taking on a new loan.
Many factors can impact vehicle equity, such as mileage, make and model, and overall condition. Because of this, it’s important for buyers to be aware of vehicle equity when making choices about financing.
How to Calculate the Equity in Your Car
Figuring out your equity is a great first step to selling or trading in a car that still has a lien. To calculate the equity you have in your vehicle, you’ll need two things:
- The amount owed on the vehicle
- The vehicle’s value estimate
Remaining Loan Balance – Estimated Value = Equity
Simply subtract the amount owed from the vehicle’s value to calculate your equity. If the result is negative, you have negative equity. If the result is positive, you have positive equity in your vehicle, which can significantly play to your advantage when financing a new vehicle.
The amount owed should be pretty easy to find. Just look at your account where your current vehicle is financed through and they should give you a remaining balance.
For the value estimate however, as mentioned before, there are many factors at play. You can use online tools like KBB to get a general estimate. Just know that this number may change during the final appraisal, but will hopefully be reliable to give you a general idea of your equity.
Best Ways to Use Equity in Your Car
If you’re planning on keeping your car, then you typically won’t need to worry much about its equity. However, it is good to check in every so often just to see its value.
Equity really comes into play when you’re trying to sell or trade in your car for a new one. This is because the existing loan must be paid off before most lenders will approve you for a new one.
Using Positive Equity
In the case of positive equity, this is easy because the value of your car exceeds the remaining balance. So the sale of your current car covers the cost and then some. You’ll often get more for your vehicle in a private party sale than in a trade in, which will allow you to fully capitalize on your cars equity. However, it often takes more time and effort.
Using Negative Equity
In the case of negative equity, things can get tricky. You can’t necessarily “use” negative equity to your advantage, but there are ways to get out of an underwater car loan that are more effective than others.
There are several options to consider:
Depending on your financial and credit situation, some of these solutions may be more appealing than others. It’s important to do your research and determine the right path for you.