Everyone wants a deal when trading in or selling their old car for a new one. One way of ensuring the deal is by understanding what equity is in a car. Whether you plan to trade it in or sell it privately, you will need to know the value of your vehicle to get the most for it. The equity, and knowing it, can mean more money for you, a greater down payment, and lesser monthly payments on your new car.
What is Equity in a Car?
The equity in your car is the appraised value of your car. If your car has an appraised value of $10,000 and you do not have an outstanding loan on it, then the equity in your car is $10,000. If you still owe money on your loan, say $6,000, then you subtract that amount from the appraised value and have $4,000 in equity.
You may also have negative equity in your car. This is referred to as being “upside-down” on your loan. Meaning, that the equity you have in your car, i.e., its appraised value, is less than what is owed on the car. Negative equity does not change the appraised value of the car. It simply means that you owe more money on the car than its appraised value. The main culprit for negative equity is through depreciation, which is the daily decrease in a car’s value once it is driven off the car lot.
People can and do trade in cars with negative equity, but it will cost you. The negative equity is usually rolled into the new loan (unless you have money saved to pay off the difference). Either way, before trading in your car, it would be in your best interests to work on paying down the loan faster to increase the equity in it.
Ways to Increase Equity
One of the best ways to build equity in your car (and avoid negative equity) is to make a significant down payment when you purchase it. Most experts would say to save 20% for a down payment to ensure equity in the car. You can also build equity by keeping the loan term as short as possible. If the loan balance is paid off over a shorter period than you will save on interest payments on the loan and increase the car’s equity at the same time. Your car’s equity goes up when the loan balance on it goes down. Finally, make separate monthly payments on the loan principal, even if it is only $20-$25, it will help to increase the car’s equity.
How Standard Car Loan Structures Work
A car loan is an act of borrowing money from a lender to purchase a car. As a contractual agreement between a borrower and lender, the loan is structured for the borrower to pay the loan back to the lender over a specific time frame, generally from two to five years. Essentially, the lender provides a service of using their credit, and in exchange, you compensate the lender for its services by paying back the line of credit, i.e., the loan amount with interest.
In most instances, car loans are structured using simple interest. This type of interest is the interest charge calculated only on the amount owed on the loan, referred to as the principal. Simple interest does not compound on the interest, which can save the borrower money over the long haul. However, simple interest does not mean that every time you make a payment on your loan that you pay equal amounts of interest and principal. Instead, car loans are paid down via amortization, i.e., you pay more interest at the beginning of your car loan than at the end. The longer the loan, the more interest you will have to pay on it, both in terms of the rate itself and the finance charges over time.
Determining Your Car’s Equity
Determining your vehicle’s equity is important whether you are planning on trading it in or selling it outright. Online appraisal tools such as Kelley Blue Book (KBB) or NADA (National Automobile Dealers Association) are available to aid consumers in determining market trade-in value or the private-sale value for their vehicles. Either ‘book’ is considered a trusted source of market value for all parties and will provide a good approximation of your car’s equity when selling it.
Understanding and knowing the equity in your car will ensure that you get the maximum value for it. Above all, keep your car well maintained. When it comes time to trade it in or sell it outright, you will get the most for your car if you have taken care of it and kept it in top condition inside and out. If you’re looking to have some extra money a title loan or personal loan may be a good solution!