What Does Having Equity in Your Car Mean?

You can’t do anything without a car in California and most Americans have experienced going to a dealership to purchase a car. If you’ve been to a dealership, you’ve probably heard the term car equity being thrown around and so you might be wondering what does having equity in your car mean? We will answer this question in much detail below.

What Does Having Equity in Your Car Mean

Having equity in your car means that the fair market value of your car exceeds the amount of money that you owe on your car. For example, if your car is worth $22,000 and you only owe $12,000 on your loan, you have positive equity of $10,000 in your car. So, the next time you hear a salesperson asking you about the equity in your car, now you know that it refers to the amount of money you in your car after your loan is paid off.

That said, you can either have positive equity in your car or you can have negative equity. You will have positive equity when the value of your car exceeds the amount you owe on it, and you will have negative equity when you owe more money on your car than its actual market value.

Here is an example of negative equity: You have a car that has a fair market value of $25,000 yet you owe $30,000 on the car. In this example, you have $5,000 of negative equity in your car.

When you head over to a dealership to purchase a car, you always want to have positive equity because you can use the positive equity as a down payment for your new car. On the other hand, if you have negative equity and want to trade in your car without paying off the negative balance, you can roll over your negative equity into your new loan.

For example, if you’re trading in your car, and your car has a fair market value of $17,000 but you still owe $20,000, you have negative equity of $3,000. Some dealers will allow you to roll over the negative equity of $3,000 into your new loan. Many people choose this option because it saves them from having to pay more cash upfront to get a car.

How to Calculate the Equity in Your Car?

If you have a car and want to calculate the equity you have in your car, you can do so by either accessing your paper statement or your online car payment statement and looking at the total amount that you owe on your car. Most lenders will place the amount that you owe on your bill.

Once you have how much you owe on your car, you should check the Kelly Blue Book value of your car by heading over to KKB’s website and entering basic information of your car, such as the make, model, year, mileage, and condition of the car. Kelly Blue Book will then give you the current value of your car.

You should deduct the KBB value of your car from the amount that you owe on the car. If the resulting number is positive, that’s the positive equity in your car, however, if the value is negative, then you have negative equity, meaning you will likely owe money on your car if you choose to sell it.

In the event that you do not want to rely on KBB to assess the value of your car, you can take your car to a dealership and ask them to evaluate your car for you. One such dealership is Car Max, you can take your car there and they will give you a free appraisal for your vehicle.

Should You Trade in Your Car?

If you want to trade-in your car, the first question that you need to ask yourself is whether you have positive on negative equity in your car. If you have positive equity, trading in your car may be a good idea for you because the dealer will you owe you money when you give them your car. You can use the positive equity as a down payment on your new car.

However, if you have negative equity in your vehicle, you should consider the options available to you. This is so because you will have to come up with the money to pay the negative equity in your car. If you don’t have the cash to pay off the negative equity, you should consider the following options:

1. Postpone – You should consider postponing trading in your car until you have either paid off your car or until you have positive equity in your car. This is so because if you have positive equity, you can use your vehicle as a down payment for your new one instead of being on the hook for paying off the loan on your trade in as well as your new car.

2. Rolling Negative Equity – The second option that the dealership will likely offer you is to roll the negative equity into your new loan. This means that the dealership will take the difference between the fair market value of your car and the amount the you owe, and add it into your new car loan. For example, if you want to lease a $25,000 Nissan Maxima and you have negative equity of $3,500 in your old car, the dealer will offer to add the $3,500 into your new loan.

You should approach rolling over negative equity into your new car because as soon as you sign your contract, you will be upside down on your new loan since your car will be worth less than the amount you owe. Also, your monthly car payment will be higher because you’re paying off your previous car as well as your new car. So, if you have the option to avoid rolling over negative equity into your new loan, you should avoid it.

3. CSP Pro Tip – Also, if the sales person at the dealership offers to lower your payments in exchange for a lengthier repayment term, you should try to avoid a repayment term that exceeds 60 months. This is so because you may start to experience mechanical problems with your car while you’re still making payments on it. Making payments on your car and payments to repair it could be burdensome for you. So, avoid it and try to keep your term below 60 months for a new car and 36 months for a used car.

Credit Score Planet Frequently Asked Questions (FAQs)

1. What does positive equity mean?

Positive equity simply means that the fair market value of your car exceeds the amount of money that you owe on your car.

2. What does negative equity mean?

Negative equity simply means that the amount of money that you owe on your car exceeds the fair market value of your car.

3. How do you know when your car has equity?

You can check whether your car has negative or positive equity by looking at the total amount of money that you owe on your car and the fair market of your car by checking a vehicle worth estimator, such as Kelly Blue Book. If the fair market value exceeds the amount you owe, you have positive equity in your car, however, if the amount of money you owe on your exceeds the fair market value, you have negative equity in your car.

4. What can you do if your car has negative equity?

If you have negative equity in your car, you generally have two options: you can either postpone selling your car until you have positive equity so that you can use it as a down payment on your new car, or you can rollover the negative equity into your loan, which means that you’ll use the loan you’re taking out to pay off the remaining balance on your trade-in.

5. How is equity calculated?

Equity is calculated by looking at the fair market value of your car and the amount of money that you owe on your car. You should then subtract the fair market value of your car from the amount of money that you owe on your car, if you’re left with a positive number, you have positive equity, however, if you get a negative number, you have negative equity in your car.

Bottom Line

So, if you were wondering what does having negative equity in your car means, this simply means that your car has a fair market value that exceeds the amount of money that you owe on your car. If you want to trade in your car for a new one, you will benefit greatly from having a car that has positive equity because it means that you’ve paid enough money on your loan that you can use your trade-in as a down payment on a new car. If you have any general questions or comments on your car’s equity, please leave it in the comments section below.