Jennifer Moore
Ever wondered how much your car is worth? That value is called equity and car equity is the difference between what your car is worth and what you still owe on it. Knowing your car’s equity is key when making decisions about refinancing, selling, or trading in your vehicle.
Positive equity can provide financial flexibility, while negative equity may require extra planning if you are looking to offload your vehicle and get something newer. So, whether you’re looking to lower payments or upgrade your ride, understanding this balance helps you make informed choices that align with your goals.
What is Car Equity?
Still a bit fuzzy on what we mean by car equity? And wondering how to determine equity in a car? Here’s the skinny—car equity is the value of your vehicle after subtracting what you owe on your auto loan.
As we said earlier, if your car is worth more than the loan balance, you have positive equity—a great position to begin when refinancing or trading in. On the flip side, if the loan exceeds the car’s value, that’s negative equity, which can complicate decisions.
Car equity plays a big role in auto financing and ownership by influencing your options and financial flexibility, whether you’re looking to refinance, sell, or trade in your vehicle.
Steps to Determine Car Equity
Let’s keep it simple. Here’s how to determine the equity in your car.
Step 1: Find the Current Market Value of Your Car
Start by determining how much your car is worth in today’s market. Use online tools like Kelley Blue Book or Edmunds to get an estimate, or visit a dealership for a professional appraisal. Keep key factors in mind, such as mileage, overall condition, make, and model, as these can influence the value.
Step 2: Check Your Outstanding Loan Balance
Know what you owe. To do this, contact your lender or log into your account to get the numbers. Be sure to check for any additional fees or potential prepayment penalties that might affect the final payoff amount. Knowing exactly how much remains on your loan is so important in calculating your car’s equity accurately.
Step 3: Subtract the Loan Balance from the Car’s Market Value
Now it’s time to do the math. Subtract your outstanding loan balance from your car’s market value. The formula looks like this:
Car’s Market Value - Loan Balance = Equity
If the result is positive, you have equity that could benefit you in a sale or refinance. If it’s negative, you may owe more than the car is worth. For example, a car worth $15,000 with a $10,000 loan balance has $5,000 in positive equity, while the reverse would reflect negative equity.
Why Knowing Your Car Equity Matters
On average, a car should last about 12 years or 200,000 miles. So, at some point, it’s going to be time for a change, whether it be purchasing a new car or one that is new to you. And even if you don’t owe anything on your car to a lender, your car will be worth at least something.
Why is this so important? Well, because your car equity impacts a lot of financial decisions.
- Refinancing: If you’re considering refinancing your auto loan, having positive equity works in your favor. Higher equity can open the door to better terms and rates, making your loan more manageable.
- Selling or Trading In: Positive equity can be a valuable asset when it’s time to sell or trade in your car. The amount you gain can go directly toward a down payment on your next vehicle, reducing the amount you need to borrow.
- Avoiding Negative Equity Risks: Understanding your equity position helps you avoid situations where you owe more than your car is worth. By staying informed, you can plan ahead and make smarter choices to minimize potential financial setbacks.
Tips to Improve Car Equity
So this begs the question—what can you do to improve your vehicle’s equity? Here are your options.
- Pay Down Your Loan Faster: Making extra payments or paying a bit more than the minimum each month can reduce your loan balance faster. This helps increase your equity over time.
- Maintain Your Car’s Condition: Regular maintenance, addressing repairs promptly, and keeping your vehicle clean inside and out can help preserve its value, which positively impacts your equity.
- Avoid Overextending Loan Terms: Long-term loans might seem appealing due to lower monthly payments, but they can slow equity growth. Choosing shorter terms helps build equity faster by reducing the balance more quickly relative to the car’s depreciation.
Refinance Your Automobile with RateWorks
If you have decided that it’s time to refinance your car, check out what we have to offer here at RateWorks. Start by exploring our loan calculator to see how much you can save. Then, get a free quote today. It’s that easy!
