Equity

Equity in auto financing refers to the ownership value a borrower has in their vehicle, calculated by subtracting the outstanding loan balance from the car’s current market value. If the market value is higher than the loan balance, the borrower has positive equity, meaning they own a portion of the car outright.

If the loan balance is greater than the car’s value, the borrower has negative equity, also known as being upside down. Equity is an important concept in trade-ins, refinancing, and selling vehicles.

Positive equity can be applied toward the down payment of a new car, reducing financing needs and improving loan terms. Negative equity, however, may require the borrower to roll over debt into a new loan, which increases costs and financial risk.

Building positive equity typically involves making larger down payments, choosing shorter loan terms, and avoiding excessive borrowing relative to the car’s value. Depreciation strongly impacts equity, as cars lose value quickly in their first few years.

Understanding equity helps borrowers make smarter decisions about when to refinance, trade in, or sell a vehicle, ensuring they minimize losses and maximize financial benefits.