Car equity is the difference between your car's current market value and the amount you still owe on your auto loan. If your car is worth more than your loan balance, you have positive equity, which is an asset you can use. If you owe more than the car is worth, you're in negative equity (or "upside-down").
Think of it like home equity, but for your vehicle. You build equity in two primary ways: by making regular loan payments that reduce your principal balance, and if your car depreciates slower than average. Some rare or classic cars might even appreciate, creating equity faster.
Positive equity is useful. When you sell the car privately, the equity is your profit. It can also be used as a down payment for your next vehicle when you trade it in at a dealership. Some lenders even offer equity loans, allowing you to borrow against your car's value for other expenses.
The challenge is that cars depreciate quickly. A new car can lose over 20% of its value in the first year. This is why many buyers find themselves upside-down early in the loan term, especially with long loan terms or small down payments. To check your equity, look up your car's value on a site like Kelley Blue Book (KBB) and subtract your current loan payoff amount.
| Scenario | Car's Current Value | Loan Payoff Amount | Equity | Situation |
|---|
| Ideal | $25,000 | $18,000 | +$7,000 | Positive Equity |
| Breakeven | $22,500 | $22,500 | $0 | Break-Even |
| Problematic | $15,000 | $19,000 | -$4,000 | Negative Equity (Upside-Down) |
