Financial Literacy
In the world of auto financing, the term “equity” is often thrown around. But what does it really mean? Whether you’re planning to sell your car, trade it in for a new one, or take out a vehicle equity loan, understanding equity is crucial. This article will explain the concept of car equity, how it’s determined, and its implications for your financial decisions.
What is car equity?
Car equity refers to the value of your vehicle after subtracting any outstanding loan balance or liens. If you own your car outright, with no loans or liens, your equity is 100%. On the other hand, if you still owe on your auto loan, the equity is equal to the car’s current value, minus the remaining balance on the loan.
Car equity is a big factor when it comes to selling or trading in your car. It can also be used to obtain a vehicle equity loan or to refinance your current loan. Understanding your car’s equity allows you to make informed financial decisions regarding your vehicle.
How is car equity determined?
Car equity is not a fixed number and can vary based on variables such as its make, model, age, mileage, and condition. Additionally, different valuation sources may provide different estimates. To determine your car’s equity, you’ll need to consider these factors and obtain an accurate valuation.
Valuation factors
To get an estimate of your car’s value, you can consult reputable online sources such as Kelley Blue Book, Edmunds, and the NADA Guides. These websites provide pricing estimates based on the information about your car. Factors such as mileage and condition play a crucial role in determining its worth.
Online pricing estimates
Online pricing estimates are divided into 2 categories: trade-in value and private-party value. Trade-in value represents the amount you would receive if you sold your car to a dealer, while private-party value represents the price you could expect if you sold it to an individual. These values are often different, as dealers may overvalue a trade-in to sell you a car or undervalue it if they don’t see much resale value.
For a more accurate appraisal, consider seeking the assessment of a reputable used car dealership. Comparing their estimate to online values can help you understand the market value of your car.
Positive equity
Positive equity occurs when the resale value of your vehicle exceeds the total loan amount. Let’s say your car’s current resale value is estimated at $15,000, and you still owe $8,000 on your auto loan. In this scenario, your car’s positive equity would be $7,000.
Having positive equity in your car provides opportunities to:
- Use the equity as a down payment for a new car
- Borrow against the equity with a vehicle equity loan
- Refinance your current loan or get a new car loan using the equity as security
Positive equity can be advantageous when it comes to purchasing a new vehicle or accessing additional funds if needed.
Negative equity: Understanding the upside down
Negative equity, often referred to as being “upside down” or “underwater” on a loan, occurs when the value of a vehicle is less than the loan balance. For example, if you owe $15,000 on a car that is only worth $12,000, your car has a negative equity of $3,000.
Factors that contribute to negative equity are:
- Depreciation due to outside factors
- High mileage resulting in wear and tear on the vehicle
- Market fluctuations affecting the value of certain car models
- Damage from accidents, vandalism, or neglect
Guaranteed Asset Protection (GAP) coverage protects you against negative equity. If your car is stolen or totaled, you won’t have to pay the difference (or “gap”) between your remaining loan balance and your auto insurance proceeds.
Considering equity when buying a car
Think about equity when you purchase your next car. If you’re buying a car with cash, you have 100% equity from the start. However, if you finance the purchase, a larger down payment will increase your equity immediately, and also may reduce the interest rate on your loan.
Additionally, making larger loan payments than required can help you build equity faster. By reducing the loan balance, you increase your positive equity. Financially, you can benefit in the long-run by considering equity throughout the car-buying process.
Car equity and financial health
Monitoring your car’s equity is just one aspect of maintaining your overall financial health. To gain a comprehensive understanding of your financial situation, consider using online resources designed to help you manage your finances effectively.
Best Egg Financial Health provides a suite of personalized financial resources to help you build a brighter future. These free debt paydown, credit monitoring, money management features could help you develop a solid financial plan and make informed decisions regarding your car and beyond.
Conclusion
Equity in a car plays a role in your financial decisions. If you’re thinking about selling or trading in your vehicle, obtaining a vehicle equity loan, or refinancing your existing loan, having an understanding about how your car equity is determined and the implications it can help you make informed choices.
When buying a car, considering equity throughout the process can lead to long-term financial benefits. By building equity with a larger down payment and making extra loan payments, you can increase your positive equity and potentially save money in the long run.
Remember, monitoring your car’s equity is just one aspect of maintaining your financial health. Accessing tools and resources like Best Egg Financial Health can provide valuable insights and help you build your financial confidence.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
