Figuring out your vehicle’s equity position involves a few simple steps – but it’s not always cut and dry. Here’s what you need to know about equity, and when it matters.
Determining Your Vehicles Equity Position
The process of figuring out your equity position is pretty simple, but it’s not always a perfect estimate. The actual condition of your car, its desirability in your geographic area, its history, and more, all determine its value and whether or not you’ve got equity. When you trade-in your vehicle, the dealer is the one that determines your car’s actual cash value (ACV).
However, online valuation sites can give you a pretty good idea of what you could get for your vehicle when you’re getting ready to sell it, or you just want to check up on your equity position.
To determine whether or not you’ve got equity in your car, here’s how to start:
- Check your loan balance with your lending institution. You can request a 10-day payoff from your lender or check your loan balance online if that option is available to you.
- Look up your vehicle’s value on valuation sites such as Kelley Blue Book, NADAguides, or Black Book. Checking on multiple sites is likely to get you a more rounded estimate.
- Compare your loan balance to the value. If you owe less than the vehicle's value, you have equity.
The Two Equity Positions When You’re Financing
Here’s a quick definition of the two equity positions:
Equity – When you owe less on the car than what it's valued at.
Negative equity – When you owe more on the vehicle than what its value is. Also called being underwater or upside-down on your auto loan.
Having equity in your car is a great advantage. It can be used to lower the cost of financing your next vehicle, and it makes it easier to sell the car. Remember that when you’re financing, you have to pay off your loan balance before you can sell the vehicle and transfer ownership to someone else.
When your car is in an equity position, it makes it easier to get a higher price for it, giving you the money to pay off the loan. And, if there's any extra cash, it can be put in your pocket or used to lower the cost of your next car.
Is it OK to Have Negative Equity?
When you’re financing a vehicle, you may not always have equity. In fact, it’s pretty common to start off an auto loan with negative equity – especially if you finance a brand new car.
One of the biggest culprits of negative equity is vehicle depreciation. All cars lose value over time, but brand new ones lose value very quickly – starting as soon as they’re driven off the dealer’s lot. Most brand new vehicles lose around 15% to 20% of their value within the first couple of years of ownership. And in that time, you may not have paid off that much on your loan, putting you in a negative equity position.
However, negative equity typically doesn’t become a problem unless you need to sell your vehicle, or if it’s totaled in an accident or stolen and never recovered. Let's take a look:
- Selling with negative equity – Before you can sell a car with a loan, you must pay off the loan completely to remove the lender from the title and transfer ownership. When you need to sell a car that's upside-down, you may not get an offer large enough from a dealer or buyer that covers your entire loan balance – possibly leaving you to cover the negative equity out of pocket or rolling it into your next loan.
- Totaled or stolen while upside-down – If the vehicle is stolen or totaled in an accident while it has negative equity, your auto insurance only pays off the value of the car at the time of the incident (unless you have GAP insurance). You’re still responsible for the remaining loan balance after insurance pays out its value even if you don’t have the vehicle anymore.
If you’re not planning on selling your car anytime soon, negative equity isn’t usually a problem that needs to be addressed right away. Over time, your timely payments can catch you up to an equity position. Negative equity almost always resolves itself with some patience.
When Equity is Useful for Bad Credit Borrowers
Having equity in your car not only offers some peace of mind but can also be a big advantage to bad credit borrowers.
If your credit is worse for wear, it’s likely that you need a down payment to get into an auto loan. If you already have a vehicle with equity, you can use that equity to help meet the down payment requirement of a bad credit lender. Down payment requirements can be met with trade-in equity, cash, or a combination of both.
Most bad credit lenders, or subprime lenders, require that borrowers have at least $1,000 or 10% of the vehicle’s selling price in cash or trade-in equity in order to qualify for financing. Your actual down payment requirement can vary, but this is pretty common amongst subprime lenders.
Down payments – whether they’re required or not – are a great idea for borrowers across the credit score spectrum. They lower the amount you need to finance, increasing your odds of qualifying for the auto loan, and decreasing the amount of interest charges that stack up. Trade-in equity can also be an easy way to provide a down payment on a car loan without having to save a lot of money, as long as there's a decent amount of equity in the vehicle.
Ready to Find a Dealership?
Many borrowers take an interest in their car’s equity position when they’re preparing to sell it. As we’ve mentioned, your vehicle’s equity position typically isn’t all that important until it comes time to get into another car.
If you’re on the prowl for a dealership and want to trade in your vehicle, then start right now with us at Auto Credit Express. Most dealers take trade-ins that are in good shape, but not all dealerships are signed up with lenders that can assist borrowers with credit challenges.
With a lower credit score, you may find it difficult to get an auto loan approval with traditional lenders. However, if you work with a special finance dealership that’s signed up with subprime lenders, your credit score may not get in the way of auto financing.
Instead of looking all over town for a dealer that’s signed up with the lender you need for your credit standing, complete our auto loan request form. It only takes a few minutes and we’ll look for a special finance dealership in your local area for you at no cost and no obligation.