What Does It Mean To Have Positive Equity On a Car?
Having positive equity on a car is a good thing—here's how to determine if you have positive or negative equity.
If you take out an auto loan to buy a car, having positive equity on a car could put you in a great position. In short, this means that if you sell your car, you'll make enough to pay off your loan in full.
Therefore, it can benefit you to know whether you have positive equity on a car and how to determine if your car is an asset or a liability.
What is Positive Equity?
You reach positive equity on a car once the market value of your car surpasses the principal amount of your loan.
Let's say you take out a $20,000 loan for a $25,000 car, and you made a $5,000 down payment. If that car's current market value is $23,000, then you would have $3,000 in positive equity.
Both you and the lender benefit once positive equity is reached because if you end up selling the car, you'll be able to make enough money to pay your loan off in full.
How Do You Determine if Your Car Has Positive Equity?
If you aren't sure if you have positive equity on a car, do a little research to find out. Check your current loan balance, and then research your car's current market value. You can do some digging on car evaluation sites based on your car's make, model, and condition to get a general idea of what your car is worth. You can also take your car to a few dealerships and ask them how much they think it's worth.
Once you've estimated your car's value, you can subtract your loan amount from that estimate to get an idea of how much positive equity you have. However, it's important to note that if you end up selling your car, you may get a slightly different price than the estimation you found online or from dealerships.
How is Positive Equity Different From Negative Equity?
If the current market value of your car is less than the principal loan amount, then you're upside down, or have negative equity in it. Let's look at the same example as before but tweak the market value.
If you take out a $20,000 loan to buy a car and the current market value of the car is $18,000, then you have $2,000 in negative equity. This means that if you sell the car, you won't make enough back to pay back your auto loan. You'd most likely have to find money from another source to pay off the loan.
How Does a Trade-In Work With Positive Equity?
If you want to buy a new car but haven't paid off your current car loan, you can choose to:
- Sell your car to an individual consumer
- Trade it in at the dealership to buy another car
You could make more money selling your car to an individual, but that route can require a lot of work on your end. A trade-in is a quick and simple process to navigate.
If you decide to do a trade-in, it's a good idea to do this when you have positive equity. If you have negative equity, you'll be on the hook for paying off that car's auto loan. If you aren't able to pay off the loan in one lump sum immediately, you may need to take out a new larger loan.
Ultimately, you may want to wait to sell until you have positive equity on a car.