woman enjoying her equity in her car
Financial Literacy

Key takeaways

  • Positive equity means the vehicle is worth more than the balance on any loan.
  • Negative equity means the vehicle is worth less than the balance on the loan.
  • GAP insurance offers protection against negative equity.

If you are thinking of selling your car or trading it in for a new one, you’ll need to know how to answer this question: What is equity in a car? To some extent, equity is in the eye of the beholder. In this article, we’ll explain why that’s true and give you the lowdown on auto equity.

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The equity in your vehicle is the value of your car after you subtract anything that you owe on it. If you own your car outright, with no loans or liens, your equity — expressed as a percentage — is 100%. If you have a loan balance, you subtract it from the car’s current value to find your equity as a dollar amount.

How is a car’s equity determined?

Equity can be a moving target because the actual value of your car depends on a number of factors, including who is doing the valuation. The age of the car and its mileage, condition, and model all come into play. And sometimes even the location of the vehicle can affect what the car is worth.

A good way to find out a car’s value is to consult one of the companies that provide online pricing estimates, such as Kelley Blue Book, Edmunds, and the NADA Guides. Enter relevant information about your car, and they provide an estimate on the car’s current resale value. For a more accurate appraisal, make sure to enter precise information about your car’s mileage and condition.

These websites often provide both a trade-in value (what you would get if you you’re your car to a car dealer) and a private-party value (the price you might get if you sold it yourself). These values often differ. Dealers may overvalue your trade-in as part of an effort to sell you a certain car. Or dealers might undervalue the car because they don’t think it’s worth the effort to resell it. If you know a reputable used car dealership, you could ask it to assess the market value of your car. You could then compare the estimate to what you find online.

Once you have an estimate, you’ll be able to calculate your car’s positive or negative equity. If you still hold an auto loan, check your loan statement for the current payoff amount or call the financial institution that manages your car loan to ask for the payoff amount. This information will give you the precise amount that you need to subtract from the value estimate to determine your car’s equity.

What is positive equity?

Let’s say your car’s current resale amount was estimated at $15,000. You check your current auto loan, and you still owe $8,000 on the car. That means your car’s current equity is $7,000.

This is an example of positive equity — when the resale value of your vehicle exceeds your total loan amount. Consumers can leverage positive equity in different ways:

  • If you sold the car, you would have roughly that much left over for a down payment on a new car.
  • You could use the equity to take out an auto equity loan to borrow money from banks or credit unions.
  • You could use it as security to refinance the current loan or obtain a new car loan.

What is negative equity?

When you have negative equity in your vehicle, it’s commonly called being “upside down” or “underwater”on the loan. This happens with auto loanswhen the value of a car decreases faster than the loan is paid down. If you owe $15,000 on a car and it’s only worth $12,000, your car has a $3,000 negative equity.

You could find yourself in a negative equity situation for a number of reasons:

  • Your car’s value could drop due to outside factors. For example, when gas prices soar, the value of big SUVs, 4-wheel-drive trucks, and other vehicles that require more fuel often goes down. Even a brand-new vehicle could suffer a substantial drop in value.
  • You might put extensive miles on your financed car. Perhaps you’ve taken it on long business trips and vacations. Vehicles lose value from high mileageand the resulting wear and tear.
  • Sometimes, a car dealer can get a premium price for a car, well over the usual retail price. Shortages, supply chain issues, or high demand for certain models can increase prices. But if the market adjusts, the car’s value may drop as a result.
  • A car could be damaged in an accident, as a result of vandalism, or by neglect. You may not have the correct type of insurance to cover repairs or you might choose not to have the car repaired at all. The result would be a drop in value of the car and a loss of equity.

One way to prevent negative equity is to pay for special coverage, called “Guaranteed Asset Protection” or GAP coverage. This extra coverage prevents you from going upside-down on your car’s equity. If your car is stolen or totaled, your insurance may not pay for what you owe on the loan, and if your primary insurance doesn’t pay the loan’s full amount, GAP coverage will step in.

The bottom line

When you’re buying your next car, think about equity throughout the whole process. If you buy a car with your own money, you have 100% equity. If you’re getting a new loan, remember that larger down payment puts more equity into your car right away. You could also make larger loan payments than your required monthly payments to build equity faster as well.

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.

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