As you conduct your research to sell your car, you may come across questions about whether you have positive equity in your car and how much. But what is equity? Simply put, equity in a car is the resale value of your car minus however much you owe on it.
Knowing how to calculate this may help you get a better deal on a trade-in and secure a loan. Keep reading to learn how to track and use your car’s equity.
Equity on a Car Loan
Equity is used to quantify the portion of the car’s value that belongs to you outright during the payment process. The more of the car loan that you pay off, the more of the car you technically own – which means your equity will be higher. Equity can be expressed as a number or as a percentage.
Conversely, negative equity is when you owe more money on the car than it is actually worth. For example, if you have $10,000 left on your loan but the car is only worth $8,000, then you have negative equity. This is also referred to as being “upside-down” on a loan.
Your equity changes as you pay off your car and also as the value of your car changes. The equity you have now will not be the same as the equity a year from now. For many borrowers, this is good news; it means that they can grow their equity over time until it reaches a favorable amount.
How to Calculate Equity for Your Car
If you want to calculate your equity on a car, start by learning how much you still owe on the vehicle. You can do this by looking at the lender website where you make payments, by contacting your agent with your lender (whether through a bank, credit union, or the dealership), or by checking your loan statements.
Then, you need to look up the value of your vehicle. You can look up the value of your car on expert websites like Kelley Blue Book and Edmunds. The make, model, mileage, and condition of your car will all determine its value, among other factors like its age and accident or maintenance history. Keep in mind that the value of your car depreciates over time from the moment you drive off the lot.
From there, you can subtract the amount you owe on the car from the amount it is worth to determine the equity. To calculate this as a percentage, divide your equity by the value of the car.
For example, consider the fictional situation below:
- If you buy a $15,000 car with a $3,000 trade-in, then you owe $12,000 on the car before interest and fees. Before you drive the car off the lot, the maximum equity you can have is $3,000 or 20%.
- Once you factor in the interest rate of your loan and fees, the final cost of the car to you after trade-in could jump to $13,500. This means your equity in the car would only be $1,500 or 12.5%.
- After a few years of paying off the car, you might only owe $6,000 on the loan. By then, the car might only be worth $10,000 due to lost resale value. In this case, your equity is $4,000 or 40%.
- Finally, once you pay off the car, you owe nothing, which means the equity is 100%. Your equity is the total value of the car, which will continue to decline as the car ages.
As you can see from these examples, your equity can grow over just a few years. The more payments you make, the more it grows, and paying off your car faster while keeping it in good condition can increase your equity.
Why Should You Track Your Car’s Equity?
One of the main reasons for tracking your car’s equity is to understand the best time to trade it in for a different model. Ideally, you would want to make sure you have positive equity in your car so you can profit from the deal.
For example, if you sell your car for $12,000 and you owe $4,000 on it, then you can pay off the loan and have $8,000 in profit from the car. However, if you sell your car for $12,000 and you owe $14,000, then your lender gets the profit and you still owe them $2,000. Tracking your car’s equity can help you at least break even when you sell it or trade it in, if not tell you the right time to sell it to turn a profit.
Knowing your car’s equity could also help you get a loan. In some cases, your lender will accept the value of your car as collateral, which means you use the value of the car as an assurance that you can pay the money back. However, you need equity in your car in order to use it as collateral.
For example, if you own your car outright, then the value of the car can be used to determine its worth as collateral. However, if you only have 50% equity, then your equity is what you can put up as collateral for the loan, not the entire car.
Can You Sell Your Car With Negative Equity?
While it is possible to sell your car with negative equity, it can be costly. If you visit a dealership to trade-in your car, then they will give you credit for what it is worth, which might not be the full amount that they would finance for another car. You will then be responsible for what you owe. There are a few options to consider if you have negative equity and want to sell your vehicle.
- You can delay your trade-in until you no longer have negative equity and can, at the very least, break even on the sale.
- You could pay off what you owe on the loan all at once. However, this typically comes out of your own pocket.
- You can try to sell your car privately. You may get more than what the dealership will offer you, but you will have to handle the title paperwork and advertising on your own.
The value of these options vary from person-to-person; you might prefer to sell your car privately while someone else would rather wait until they have equity. The right decision is based on your individual financial situation.
Your Equity Can Help You Make Smart Car-Buying Decisions
There are many factors to consider in the car-buying process, and equity is an important one. Your equity can tell you when you will turn a profit and what kind of collateral you can put down for a loan. Your equity changes over time and can grow through regular car payments.
Use our resource guides to learn about other factors in the car buying process, including what credit score you need to buy a car and what steps you need to take to get an auto loan.
