Vehicle equity is your car's value. If you have a car loan, it's the difference between your car's value and what you owe on the loan. When the value of your vehicle is more than what you owe, you have equity. At the same time, although depreciation (a decrease in your vehicle's value) happens every day, maintaining equity in your vehicle will benefit you, especially if you have credit challenges.
According to Edmunds.com, new vehicles lose approximately 11 percent of their value as soon as they leave the lot. This initial drop can be hard to swallow. For example, if the initial True Market Value (TMV)® of your vehicle is $25,000, it will lose $2,750 of that value. Overall, vehicle owners will see the steepest drop in value in the first year of ownership.
If you plan to drive your vehicle into the dirt, depreciation should not impact you as much as someone whose goal is to trade in their car sooner.
What Having Equity Can Mean
Due to depreciation, it can be difficult to increase your equity stake in a car. One of the most immediate ways to build equity in your vehicle is to make a substantial down payment, at least 20 percent, at the time of purchase.
Another way to stave off negative equity is to keep the loan term as short as possible. Shortening your contract will help you reduce the loan balance more quickly, saving money on interest. Because your equity in a vehicle goes up as the loan balance goes down, it also helps if you can make larger payments for a shorter time. The goal should be to pay off the loan faster than the car can depreciate.
When you are looking to purchase a new vehicle, a well-maintained trade-in vehicle can be the key to starting off a new loan on the right foot. The more equity you have in your current vehicle, the more you can knock down the price of your next car. If your car is paid off entirely, you can apply all of its value toward your purchase.
Holding on to Your Vehicle's Value
Maintaining equity will help you avoid being “underwater” on a vehicle, which means you currently owe more on the loan than the car is worth. Depreciation causes many consumers to be underwater, but doing what you can to increase and maintain your vehicle’s value can make a difference. Let’s look at how to maintain equity in your vehicle.
- Perform regular maintenance—In order to best maintain your vehicle’s resale value, you should follow the manufacturer’s recommended guidelines for service. Practicing regular maintenance, such as changing fluids, replacing filters and keeping good tire pressure, will help keep your vehicle in good condition.
- Keep service records—As you maintain your car, make sure you keep records of the services rendered. This can show a prospective buyer or dealer how well taken care of your vehicle is. It may be a good practice to have service performed at a dealership, as many dealers update service records to the vehicle history report. This report is often the first thing a prospective buyer will look at for a complete history of the vehicle.
- Appearance is key—Your vehicle's appearance, both inside and out, can add value if you take care of your car. To maintain the exterior of your vehicle, wash and wax it often and take care of minor scratches and dings as soon as they happen. This also means paying attention to your surroundings to avoid preventable damage. As for the interior, avoid eating and smoking in your vehicle. These odors can be difficult to remove and can drastically impact its resale value. To help prevent damage, use seat covers and, especially in areas with drastic changes in temperature, keep your vehicle out of the elements.
- Avoid excessive mileage—A vehicle’s mileage compared to its age has a significant impact on its value. The more miles you drive per year, the quicker your vehicle will depreciate.
The Bottom Line
Having equity in a vehicle to trade in on a new car can really help you. The greater your current equity, the less chance you'll have of starting out upside down in your new vehicle. This is especially important if you have a bad credit auto loan. This is because a larger down payment will not only reduce the amount you have to borrow, it will also cut back on the interest charges you'll be paying.
At Auto Credit Express, we know how difficult it can be to navigate the vehicle financing waters. Let us help by providing you with a dealer who has options for consumers with credit challenges. If you are ready to start the car buying process, take the first step and fill out our auto loan request form now.