Does My Car Have Equity? How to Calculate and Use It

Understanding your car’s financial value, known as car equity, is an important part of managing personal finances. Car equity is a tangible asset that can influence various financial decisions, from purchasing a new vehicle to securing a loan.

Understanding Car Equity

Car equity is the difference between your car’s current market value and the outstanding balance on its loan. When your car’s market value exceeds your loan balance, you have positive equity, meaning the vehicle is worth more than what you owe. Conversely, if the loan balance is greater than the car’s market value, you have negative equity, often referred to as being “upside down” or “underwater.”

To determine your car’s current market value, use reputable online valuation tools such as Kelley Blue Book, Edmunds, or NADA Guides. These platforms require specific information about your vehicle, including its make, model, year, mileage, and overall condition.

To find your outstanding loan balance, contact your lender directly, check your online loan portal, or review recent loan statements. Obtain the exact payoff amount, which includes any accrued interest and fees, rather than just the principal balance. Once you have both figures, simply subtract the loan payoff amount from the car’s current market value. A positive result indicates positive equity, while a negative result signifies negative equity.

Factors Influencing Car Equity

Several factors contribute to how a car’s equity changes over time, impacting both its market value and the outstanding loan balance.

Vehicle depreciation is a primary factor affecting a car’s value. A new car typically loses a portion of its value, often around 20-30%, within the first year of ownership, and this depreciation continues at a slower rate in subsequent years. Factors such as the car’s make, model, age, and mileage play a considerable role in its depreciation rate.

The vehicle’s condition, including its maintenance history and any accident history, influences its resale value. A car with a comprehensive service history and evidence of regular maintenance commands a higher price, potentially boosting its resale value by 10% to 20%. Market demand, influenced by factors like fuel efficiency and the popularity of certain models, affects how well a car retains its value.

Regarding the loan balance, the initial down payment made when purchasing the car directly impacts how quickly equity builds. A larger down payment reduces the financed amount, increasing your initial equity and accelerating the path to positive equity. The loan term and interest rate play a role; longer loan terms, while offering lower monthly payments, lead to slower equity growth and a higher total interest paid over the life of the loan. Making consistent or even additional principal payments reduces the outstanding balance faster, thereby building equity more quickly.

Utilizing Car Equity

Once you understand your car’s equity position, you can explore various options to leverage it. The strategies available differ depending on whether you have positive or negative equity.

For car owners with positive equity, several beneficial actions are possible. You can sell your car, either privately or to a dealership, and use the equity as a down payment for a new vehicle. This reduces the loan amount needed for your next purchase and lowers your monthly payments.

Refinancing your existing auto loan is another option, allowing you to secure better terms, such as a lower interest rate or a shorter loan term, especially if your credit score has improved. Additionally, you might consider an auto equity loan, which allows you to borrow money using your car as collateral. These loans offer lower interest rates than unsecured personal loans, but defaulting on payments results in vehicle repossession.

If you find yourself with negative equity, meaning you owe more than your car is worth, strategies address this situation. One approach is to make extra payments solely towards the principal balance of your loan, which reduces the amount you owe faster than the car depreciates. Another strategy is to wait for the car’s value to increase or for the loan balance to decrease through regular payments until positive equity is achieved. While it is possible to roll negative equity into a new car loan when trading in your vehicle, this action increases the new loan amount and results in higher monthly payments and a longer repayment period, effectively putting you “upside down” on the new vehicle from the start.