What is Vehicle Equity?
Before you walk into a dealership to trade in your vehicle it is important to know the equity you presently have or don’t have. If you are wondering, “What is vehicle equity?” or “What does it mean?” It’s important to know the answers to these questions. Knowing the equity in your car can equate to a larger down payment toward a new car. In other words, the trade-in value on your old car can get you a better deal on a new one.
Simply put – vehicle equity is the appraised value of your car. If you have an outstanding loan on the car, it is the difference between the amount still owed on the vehicle and the appraised value of the vehicle. If your car has been appraised for $12,000 and you own it outright, then you have $12,000 in equity in it. However, if you still owe $7,000 on the car loan, your equity is $5,000, i.e., the difference between the value of the car and what is owed.
What is Negative Equity?
There is also the possibility of having negative equity in your car. This is often referred to as being “upside-down” on your loan. Negative equity does not change the appraised value of the car. If there is an outstanding loan on the car, the equity is still the difference between what’s owed on the loan and the value of the vehicle. If you owe more money than the appraised value of the car, the equity in the car is considered negative. For example, if a car is valued at $5,000 but you still owe the lender $7,000 then the equity on the car is minus $2,000—that difference is what is referred to as negative equity.
Though it is not to your benefit, you can trade a vehicle in with negative equity. In doing so, the borrower must either pay the difference or that difference can be rolled into the new loan. You can avoid negative equity by saving up a good down payment on the car before you first apply for financing. Or, before trading in your car, work on paying down the loan on it faster to increase the equity in it.
Assessing Your Car’s Equity
Automotive markets fluctuate with the seasons, making it difficult enough to appraise the value of your car. Your car’s value is also determined by where you live. These two factors alone make calculating the value of your car somewhat subjective. On top of this, equity in your vehicle is also calculated by whether you are selling it privately or trading it in. There is the trade-in value and the private-sale value to consider. When you add the trade-in value versus the private-sale value into the mix, and determining the vehicle’s equity can be frustrating.
Private Sale vs Trade-In Value Versus
Fortunately, there is a way to get a handle on the trade-in value versus the private-sale value. Even though you may not be able to calculate the exact value of your car, you can get a good approximation by using online appraisal tools like Kelley Blue Book (KBB) or NADA (National Automobile Dealers Association), which projects market values for vehicles by zip code. Once you are on a website like KBB, indicate whether you are calculating the trade-in value or the private-sale value (the former is lower than the latter). Then, enter your vehicle’s information as accurately as possible. When selecting options, be as objective as you can, don’t omit anything, but don’t add anything extra either. In other words, be realistic about your vehicle’s condition—dings, dents, scratches—warts and all.
Once all the information has been filled out on the online form, one last click and KBB will present the “Blue Book Value.” That value is a very good idea of what your vehicle is actually worth, trade-in or private sale. Once you have calculated the value, then you can calculate your vehicle’s equity. For example, if you own the vehicle outright, then that value is the equity. Otherwise, the value is the difference between what is owed and the KBB value.
If you are trading your car in, the dealership will provide you with an estimate on your vehicle’s value, too. They will inspect its condition and compare it to the local and regional market for that make and model car. Then provide you with a market value and a trade-in value. The number they provide you will refer to NADA estimate but should be in the ballpark of the KBB number.
Determining your car’s equity is important whether you are planning on trading it in or selling it outright. You will get the most for your car if you take care of it and keep it in top condition. Finally, bear in mind that the numbers you get from KBB or NADA websites are only an approximation, but reliable ones nonetheless. As long as the lender and you agree on the approximate value of your vehicle, you can use that equity toward the next car you purchase. In this way, you will have equity in your new car when you drive it off the lot.
If you’re looking to buy a used car or trade your vehicle in, check out our huge inventory of quality used vehicles and give us a call today!