In this article:
- Defining car equity
- The benefits of positive equity
- The difference between positive and negative equity
When it comes to words associated with car ownership, equity is one of the top terms it’s good to be familiar with. Equity not only gives you an idea of the worth of your vehicle, specifically, it defines the worth and value to you as the car owner.
Experian defines equity on a car as the “difference between the resale value of the car and the amount you owe.”
Vehicle equity comes into play if you want to trade in your current automobile for a new one, possibly using your current vehicle as the down payment. And what you’re looking for in this situation is known as positive equity.
Positive equity explained
Positive equity in a car is reached when the amount you owe on the car is less than the amount the car is currently worth. For example, let’s say you make a down payment of $5,000 on a car priced at $40,000, therefore getting a loan of $35,000. If that car’s current market equity is showing to be $37,000, you have $2,000 in positive equity on that car.
How positive equity differs from negative equity
Now that you know about positive equity, the flip side of that would be, yep, negative equity. That is, owing more on a vehicle than the car is worth. If you’ve heard the phrase being “upside-down” on a vehicle, negative equity is what that is referring to.
In our example above, if the car’s current worth was $33,000 instead of $37,000, that would result in negative equity of $2,000 based on a loan of $35,000.
How to calculate a car’s equity
To calculate your current car’s equity, start by checking the balance you owe on your current car with your lender. Once you have that, you need to know the current market value of the vehicle. Resources such as Kelley Blue Book can help you get an estimate of what your car is currently worth and if your equity would then be positive or negative based on that amount.
Influencing factors on equity
So, what factors can impact positive and negative equity in a car? As your time with a vehicle goes by, regular wear and tear can impact the car’s overall value. Things like:
Vehicle Age (As a vehicle ages and newer models and designs come out, this could reduce the value of the car.)
Mileage (Lengthy daily commutes and multiple long-distance road trips can put miles on a machine quickly.)
Accidents (If your vehicle has been in a fender bender and has yet to be fixed, a cracked windshield, missing hubcap(s) or other damage to the body can cause the value to be much less.)
Considering equity when buying a car
To keep on top of equity when looking into your next vehicle, make sure you are diligent with your research and understand the cost of options, financing and taxes so you aren’t already upside-down when you drive out the door. Consult resources such as Kelley Blue Book and Edmunds to estimate the true value of the car.
Loan terms
Looking at your monthly budget, choose the shortest repayment plan you can afford because shorter repayment plans typically mean lower interest rates and faster payoff. Our car budget calculators* can help you see where certain terms work with your finances.
Interest rates
Check the car manufacturer’s website for possible interest rate deals as well as online shopping sites that offer pre-qualification. Pre-qualifying lets you shop with confidence and gives you buying power with the dealer. Discover more about the difference between interest rates and APR here.
Depreciation
According to Kelley Blue Book, a car’s value depreciates 20% in the first year of ownership and can lose 60% of value by the fifth year. Making a down payment of at least 20% of the vehicle’s total cost can help offset the depreciation and set you on a route toward positive equity.
*The referenced calculators are meant for educational and illustrative purposes only. The calculators estimate amounts solely based on the information you provide. We do not guarantee the availability of the illustrated terms or your eligibility for any product referenced. The estimated amounts generated from the calculators do not constitute a finance offer.
