To determine if you have negative or positive equity in your car, all you need to do is subtract how much your debt on the vehicle from the market value.
Knowing whether your equity is considered positive or negative is important if you're thinking about refinancing your car loan, selling the car or trading it in to a dealership. This is what you should know.
What Is Positive Equity in a Car?
When borrowing cash with a conventional car loan, the automobile acts as collateral for the loan. So if you end up defaulting around the debt, the lending company has got the right to repossess the vehicle then sell it at auction to recoup what you owe.
Positive equity occurs when the market price of the car exceeds the principal amount in your loan. For instance, should you owe $10,000 on a car with a current market value of $12,500, you have $2,500 in positive equity.
Having positive equity with a car loan is a good sign for both you and the lender since it implies that if you sell the vehicle, you'll make enough to pay off the loan entirely, leaving the lending company satisfied and also you with no extra debt.
What Will it Mean to Have Negative Equity?
If you've negative equity together with your auto loan, this means the market value of the vehicle is less than the main amount of the loan. As an example, a $12,500 car loan balance on the car now worth $10,000 leaves you with $2,500 in negative equity.
Negative equity could possibly cause problems for both your lender. If your car is totaled, for instance, you may not get enough money from your insurance company to pay off the borrowed funds entirely. And when you can't pay off the negative equity amount, the lender might be out those funds.
Also, let's say you sell your car or trade it in when buying a replacement, the sales price won't be enough to pay off the borrowed funds entirely. To satisfy the lending company within this scenario, you'll typically have to pay a lump sum amount of the main difference, closing out the loan.
In some cases, a dealer may remove the full amount borrowed for you personally and roll the quantity of the negative equity to your new loan. While this might seem appealing, keep in mind that it'll improve your new loan amount and you'll still pay interest on it.
How to determine the Equity inside your Car
Remember, to calculate your car's equity, you'll need to subtract the principal quantity of your auto loan in the car's current value. While you can look into the current amount borrowed by signing in to your online account with the lender, getting the car's fair market value takes a bit more time.
One way is to look up the car's value on Prizes. You'll go into the car's year, make and model, as well as its current mileage and your Zipcode. If the model has several style, you'll choose yours from a list, then obtain the value using the car's standard equipment or options.
Finally, you'll supply the color of the car and it is current condition—you can have a quick quiz if you aren't sure.
As a good example, a 2022 Hyundai Santa Fe Sport in good condition with 102,000 miles may be worth roughly $8,237 if you were to trade it in. And if you had been to market it to a private party, you can get around $11,000 from the sale.
If you owed $7,000 on the car, your equity would be positive, with $1,137 in positive equity having a trade-in or about $4,000 in positive equity with a private sale. In contrast, if you owed $9,500, you would have negative equity if you were planning to trade it in and positive equity should you be planning to market it to some private party.
In this, it's important to understand how much equity you have based on the type of sale so you can make the best decision for the situation.
When May be the Right Time to Trade in My Car?
Trade-ins typically net a lesser sales price since the dealer then removes and marks up to market to the next owner. Consequently, it's usually easier to sell your car to a private party.
If you don't have time to undergo that process or just like the ease of dropping the vehicle off in the dealership while you pick up your new one, trading it in can be a better option.
The best time to trade in your vehicle is when you have positive equity. If you have negative equity, you'll be on the hook for paying off the rest of the loan, either immediately or in the type of a bigger new loan. While the latter option sounds appealing, it may be easier to wait until you can pay down your current auto loan balance first, if at all possible.
One exception to that particular rule is that if your credit has improved significantly because you got the very first loan. Even if you roll the negative equity into your new loan, a significantly lower interest rate can save you money if the alternative continues to pay a high rate on your original loan.
Is The Proper time to Trade In?
If you're considering buying a new car and exchanging your present one, run the numbers to discover whether you have negative or positive equity. If you can manage to sell the car to some private party and obtain more money out of the transaction, try that route first.
If, however, trading the car in is the best choice for you personally and you've got negative equity, you can check your Experian credit rating to see if you may be able to get a lower interest rate around the new loan. If that's the case, trading in could end up saving you money in the form of lower interest charges.