How Does Positive Equity Work?
When it comes to car ownership, understanding the equity in your car is just as important as focusing on the monthly payment, interest rate, or loan term. Yet, positive equity on a car is what makes a huge difference when you’re preparing to upgrade your vehicle. At Aschenbach Ford, we have guided numerous drivers through the complexities of auto financing, and we’re dedicated to simplifying the process for you. In this article, we’ll define what positive equity on a car is and how to make the most of it when it’s time to move on from your current ride. Visit us today in Wytheville, VA!
What Is Positive Equity On A Car Loan?
In simple terms, positive equity on a car is what makes your car worth more than what you still owe on your loan. Car equity refers to the value you have in your vehicle, calculated by subtracting the remaining loan balance from the car’s current market value. For example, if your car’s current value is $22,000 and you owe $16,000 on it, you’ve got $6,000 in positive equity. The difference that remains is all yours – it can be applied to the down payment on your next car, used to reduce your monthly payments, or pocketed if you choose to sell the car outright.
While it’s often used interchangeably, there’s a subtle distinction when we talk about what positive equity on a car loan is. Positive equity on your car loan simply refers to the financial position you’re in when the balance of your loan is lower than the value of your vehicle. Positive equity means your car’s market value exceeds the loan balance, while negative equity means the loan balance surpasses the car’s market value. It’s a sign that you’ve either made solid progress toward paying down your loan, your car has held its value well, or both. Understanding your car’s current market value is crucial for determining whether you have positive or negative equity.
How Do You Know If You Have Positive Equity On A Car?
Step 1: Determine The Current Market Value of Your Vehicle
You can use online appraisal tools, check trade-in values with us here at Aschenbach Ford, or browse listings for similar models in your area. Kelley Blue Book is a trusted source for assessing your vehicle’s market value, taking into account factors such as its make, model, year, condition, and mileage.
Step 2: Find Out Your Loan Payoff Amount
This is the full amount required to pay off your loan today, not just the remaining balance listed on your last statement. You can get this by contacting your lender directly.
Step 3: Subtract Your Payoff Amount From Your Vehicle’s Current Value
If the number is positive, you have what is called positive equity on a car. If it’s negative, you’re still upside down on the loan.
How To Get Positive Equity on a Car
Building equity doesn’t happen overnight, but there are smart strategies you can use to get there faster. Improving your financial situation by making extra payments or choosing a shorter loan term can assist you on the journey to building equity faster.
Make A Larger Down Payment
The more you put down when you first buy the car, the less you’ll owe – and the sooner your loan balance will dip below your vehicle’s value. A larger down payment reduces how much you would need to finance with a new car loan, making it easier to build equity.
Choose A Shorter Loan Term
Longer loans may seem appealing due to lower monthly payments, but shorter terms help you build equity quicker because you pay down the principal faster. Opting for a shorter auto loan term can accelerate the repayment process and enable you to build equity at a faster pace.
Avoid Overpaying For A Vehicle
Start off strong by getting a fair price. Ensuring you don’t overpay for your current vehicle can help you avoid negative equity from the start. Our team at Aschenbach Ford can help ensure you’re not upside down from the moment you drive off the lot.
Keep Your Car In Great Condition
Maintaining your vehicle well helps preserve its value and is what positive equity on a car is established significantly by, giving you a better chance at positive equity when it’s time to trade or sell. Regularly checking and recording your car’s current mileage can also help you keep track of its value.
Make Extra Payments When You Can
Any time you pay more than your scheduled monthly amount, that money goes directly toward the principal, helping you reduce the loan balance faster. Making extra payments can reduce the total interest paid over the life of the loan.
Why Positive Equity Matters When Trading In
Positive equity on a car is what gives you more freedom. When you have equity in your vehicle, trading it in or selling becomes a straightforward process. Selling your car to a private party can often come with a higher price than trading it in, maximizing your equity. You can apply that value directly to your next purchase which may result in a lower monthly payment on your new vehicle, a larger down payment without coming out of pocket, and the ability to qualify to access better loan terms.
Let’s See Where You Stand
Understanding what positive equity on a car is helps you to make smart, informed decisions about how you decide to sell or trade your vehicle. Knowing your car’s equity status allows you to make informed choices that can improve your financial situation. Whether you’re planning to upgrade soon or just want to monitor your loan’s progress, positive equity can be a powerful tool in your corner. If you have more questions about what positive equity on a car is, stop by Aschenbach Ford. We’re here to help you make the most of your trade in and your next chapter on the road. Visit us today in Wytheville, VA!
