In many cases, the car you own now is an investment in the future; you’ll be able to sell it for what it’s worth or trade it in against the price of a new car further down the road. It’s called “positive equity,” where what the car is worth is more than what you owe on it. But it’s taking longer to meet positive equity for some buyers, and for consumer advocates, that’s a point of concern.
Positive equity is key to the auto industry. You might notice that your dealership not only sells new cars but also used cars. They may call them “quality pre-owned” vehicles or “refurbished” cars, but in the end, they’re used cars.
And used cars are big business; they make up nearly half of car sales in America. But, of course, for there to be used cars, they first have to be new cars bought by someone, which is where positive equity is important.
Essentially, positive equity means that you, the consumer, could get a new car by trading in your old one. It’s not recommended until you’ve paid off your loan, of course, but the option is there. It also means for the dealer that they’re receiving a used car of a certain value. So, any shift in how long it takes consumers to reach positive equity is going to raise a few eyebrows.
The good news is that although the time to positive equity has risen slightly, it’s not for the reasons you might suspect. And it will have an impact on the industry.
The fundamental reason it’s taking longer to reach positive equity? People are keeping their cars longer, and they’re taking out longer loans. The average length a car is owned by a household, and the average auto loan term, has steadily inched up over the last few years: Currently, on average, Americans will keep their cars for more than a decade, and pay it off five and a half years into that span.
As a result, positive equity is reached about three years after you first take your car off the lot, up from two years in the early 2000s. Of course, there’s a number of factors that go into this; some cars depreciate in value more quickly than others, and how much you drive your car has a heavy impact on its trade-in value. But, over the long haul, positive equity will collect.
One thing it’s important to note: Positive equity on your car and loan is not the same as making money. Your car is going to lose value over time, and you won’t get back, in trade-in value or cash, what you paid for it unless you own a collector’s piece or find a very generous buyer. That’s worth remembering; a car is an investment, to some degree, but it’s not one you should expect to retire on.
That said, before buying any car, sit down with your loan, the depreciation schedule for the car you’re considering, and a calculator and work out your positive equity. If you’ve got that in mind, you’ll make a better purchase.