There were almost 287 million registered cars in the U.S. in 2020. And each year, this number climbs a little higher as more Americans own cars.
If you’re a car owner, it’s time you learned about car equity. Car equity is the difference between how much you owe on your car (loan balance) and what the car is currently worth.
Now keep reading as we explore the connection between car equity and car loans.
From Car Loan to Car Equity
Many Americans can’t pay cash for a car and need to finance the purchase with a loan. This is what most think of when they hear “car loan.”
Car loans often last for 72 months. Car loans used to be 48 to 60 months, but the rising cost of cars has changed loan limits. Some lenders now even offer 84-month loans.
Interest rates depend on your financial profile, lender, and vehicle details. But, they are generally low since car loans are secured loans. Your car is collateral.
As you pay off the loan, your car equity will grow. For example, you put 20% down when buying a car for $30,000. Your equity was $6,000.
Now, your car is worth $18,000, and you still owe $6,000. Your equity is $12,000.
There are car loans for those with bad credit available. Some lenders call these subprime or second-chance car loans.
Bad-credit car loans are the same as a standard auto loan, but they often have a higher interest rate. You still build equity with a bad-credit loan, but it’ll take a little longer.
Most lenders allow you to refinance your car loan if you’re going through a difficult period. Refinancing can help:
- Lower your interest rate
- Decrease your monthly payment
- Pay off your loan sooner
You’ll still have equity when you refinance a car loan. But, you want to be careful that you don’t end up with negative equity when you refinance.
Car Equity Loan
A car equity loan is not a loan you take to finance a car. Instead, it’s a loan you can get based on how much car equity you have. You can use the money for other financial needs, such as paying off high-interest credit card debt.
Some lenders allow you to borrow up to 125% of your equity. So if you have $20,000 in equity, you could borrow up to $25,000. It’s easy to qualify for a car equity loan, and you can have the money faster than other loans.
It’s a great option to consider if you don’t have a loan balance and need access to lower-interest funds. However, if you still owe a balance, ensure you can afford interest payments on two loans before taking out a car equity loan.
Title loans also use your car equity, but they are short-term, a month or less. Unfortunately, interest rates are high, and many struggle to afford the terms.
You can learn more about car equity and title loans to see if it’s a sound financial decision for you.
Learn More About Finances
Building car equity gives you access to funds you may need in the future. A car equity loan could help you accomplish another financial milestone without paying high fees and interest rates.
If you want to learn more about all things finances, check out the Finance section above.