Vehicle equity is different from its value – if you still owe money on the car. Whether or not there's equity in your vehicle typically doesn't matter unless you need to sell or trade it in before you're finished paying for it.
Equity and Value Basics
Equity is the value of your car, minus what you owe on your auto loan. If your vehicle is worth more than you owe, you have equity. On the other hand, if you owe more on your loan than the car is worth, you have negative equity. If you own a vehicle outright, its entire value is equity.
It's important to know that car values aren't hard-and-fast numbers, which means how much equity you have depends on who's evaluating your vehicle.
Let's look at some terms you need to know when it comes to the value of your car:
- Depreciation – Vehicles are depreciating assets, which means they lose value over time. Depreciation can't be stopped, and all cars depreciate differently. Some makes and models are known for holding their value better than others.
- Estimated value – You can estimate the value of your own vehicle by visiting Kelley Blue Book (KBB) or NADAguides yourself, but the value they show is an estimate.
- Actual cash value (ACV) – The ACV of a car depends on what a dealership is willing to give you in cash or trade.
- Book value – Dealers typically use auction values as well as guides that list estimated values for different years, makes, and models. The most common book used by dealerships is Black Book, but many use KBB or NADAguides, as well.
- Equity – When your vehicle is worth more than you owe on it.
- Negative equity – When you owe the lender more than the car's value.
Many pieces of the puzzle fit together to determine the ACV of your vehicle. We mentioned that depreciation can't be stopped, but it can be slowed. The easiest way to slow depreciation is to take good care of your car.
Finding Your Car's Equity Position
Having equity in your car is important when you trade it in or sell it. Without equity, your vehicle is just a liability, not an asset you can use. When there's equity in your car, you can use that value to cover all or part of a down payment on another vehicle, or you can pocket the cash.
If you still have a balance on an auto loan and have negative equity, trading in or selling it means the entire amount you sell it for must go toward paying your lender, and you have to come up with more cash to pay off your loan.
But how do you know where your car’s value stands? That's where valuation sites such as KBB and NADAguides come in. You can get an estimated value for your vehicle just by entering in some information on these sites. A key to getting the most accurate estimate is to be honest when you answer questions about your car. The more accurate you are, the more realistic your valuation estimate is going to be.
Now that you have an idea of what your vehicle could be worth, you need to compare that to your loan balance to see if there's equity in your car. To do this, contact your lender to get a 10-day payoff. This is the amount you owe on your vehicle plus 10 days of interest. If your estimated value is more than your payoff amount, you may have equity!
If you need to trade in or sell your current car, it's best to do it when you have equity, so you don't end up paying too much out of pocket. It's also a good idea to protect your vehicle by keeping it clean, and keeping up with regular maintenance, which can help maintain its value.
Ready to Use Your Equity on Your Next Car?
If you need another car and are ready to put the equity in your current vehicle to work as all or part of a down payment, you first need to make sure that you're applying with the right kind of lender for your credit situation.
If you struggle with credit issues, it doesn't have to stop you from getting the car you need. Here at The Car Connection, we want to get you connected to a local dealer that has lenders available to assist borrowers in unique credit situations. To take the stress and hassle out of finding your next auto loan from a special finance dealer near you, fill out our free car loan request form!