How Much Equity Do I Have in My Car?
Gain clarity on your car's true financial ownership. Learn to assess its equity and understand how to utilize this asset.
Equity, in financial terms, represents the portion of an asset’s value that an individual truly owns outright. When applied to a car, this concept signifies the difference between the vehicle’s current market value and any outstanding debt owed on it. Understanding car equity provides insight into a significant personal asset.
Defining Car Equity
The current market value refers to what the car would sell for today, influenced by various factors, rather than its original purchase price. This value fluctuates, reflecting the vehicle’s real-time worth. The outstanding loan balance includes the principal amount still owed, along with any accrued interest that has not yet been paid. If a car’s market value falls below the outstanding loan balance, the vehicle is in “negative equity,” often referred to as being “underwater.”
How to Calculate Car Equity
Determining your car’s equity involves two primary steps: accurately assessing its current market value and identifying your precise outstanding loan balance.
To determine your car’s current market value, utilize reputable online valuation tools such as Kelley Blue Book (KBB), Edmunds, or NADA Guides. These platforms require specific information about your vehicle to provide an accurate estimate, including its make, model, year, trim level, mileage, and a truthful assessment of its overall condition.
Next, ascertain your outstanding loan balance, which is the exact amount required to fully pay off your loan. This figure is often different from the principal balance shown on your most recent statement because it includes interest accrued since that statement was generated, along with any applicable fees. You can obtain this precise payoff amount by contacting your lender directly, checking your online loan portal, or reviewing a recent loan statement. Lenders can provide a payoff quote, which specifies the amount needed to satisfy the loan by a particular date.
Once you have both figures, the calculation is straightforward: Car Equity = Current Market Value – Outstanding Loan Balance. For example, if your car’s market value is $18,000 and your outstanding loan balance is $12,000, your car equity would be $6,000.
What Influences Car Equity
Several factors continually influence a car’s market value, directly affecting its equity over time. One significant factor is depreciation, the reduction in a car’s value as it ages and accumulates wear. New cars typically experience substantial depreciation, losing around 20% or more of their original value in the first year alone, and up to 55-60% within the first five years.
Mileage also plays a considerable role; higher mileage generally indicates more wear and tear, leading to a lower market value. For instance, a car’s value can depreciate by approximately 20% for every 20,000 miles driven. The physical and mechanical condition of the vehicle, including its interior, exterior, and maintenance history, significantly impacts its value. A well-maintained car with a documented service record tends to retain more value compared to one with damage or neglected upkeep.
Broader economic conditions and market demand also influence car equity. Factors such as fuel prices, overall supply and demand dynamics, and the popularity of specific models can cause values to fluctuate. Consistent and timely loan payments reduce the outstanding balance, which gradually increases the owner’s equity in the vehicle.
Options for Car Equity
Once a car owner has established positive equity in their vehicle, several practical options become available.
One common option is to sell the car outright, either privately or to a dealership. Upon sale, the outstanding loan is paid off from the proceeds, and the remaining amount, representing the equity, is returned to the owner.
Another frequent action is trading in the car toward the purchase of a new vehicle. In this scenario, the car’s equity acts as a down payment, reducing the amount that needs to be financed for the new purchase. This can lead to lower monthly payments or a shorter loan term on the subsequent vehicle.
For those seeking to adjust their current financing, refinancing the car loan is an option. Having established equity can sometimes make an owner eligible for more favorable loan terms, such as a lower interest rate.
Finally, some lenders offer a “cash-out refinance” or “auto equity loan,” where the owner can borrow against the car’s equity. This process involves taking out a new, larger loan that pays off the existing car loan, with the difference being provided as a lump sum of cash to the owner. The car serves as collateral for this new loan, allowing access to funds while retaining use of the vehicle.