What is Car Equity And How Does it Help Me Qualify For A Loan?

What is car equity?

Equity is a nuanced concept, but everyone who owns a car needs to understand it. This is especially true for people who want to refinance their car to pocket cash or pay off high-interest debt.

People sometimes describe equity as how much of an asset you own. However, we may own the t-shirt we're wearing. No one talks about having equity in a t-shirt.

 

So What Is Car Equity?

Equity is the value of your ownership interest — the value of the car, minus your car loan. If you sold the vehicle and paid off any attached loans, the cash you would be left with is your equity in that car.

Suppose you owe $7,000 on your car. If you sold it for $10,000 and used the proceeds to pay off the loan, you would have $3,000 left over. In this example, your equity in the car is $3,000. If you had no auto loan, your equity would be $10,000, the full value of the car.

Upside-Down Equity

Stranger Things did not invent the "upside-down" — it also refers to when equity becomes a negative number, meaning you owe more than the car is worth.

A brand new car loses 5%-10% of its value the moment you drive it off the lot. Additionally, cars depreciate 10%-20% each year. If you make a small down-payment with high interest on a new car, you could become upside-down very quickly.

Your Car Equity is an Asset

If a lender asks you for your net worth when you apply for a loan, you can report your equity in your car as an asset. Find out what your car is worth using a service like Kelly Blue Book or Edmunds, subtract what you still owe on it, and enter the difference into the loan application as "Automobile Equity."

That number doesn't represent cash in your bank account, but adding it to your net worth is allowed. It could make you look like a better credit risk to a lender.

Suppose you are applying for a new loan against the car itself (a.k.a. refinancing" or refi), the lender will want to see positive equity (not upside-down equity), since a new loan up to the value of the vehicle might then be able to pay off the balance of the old loan, with some cash left over to use as you please.

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