Your equity in an item equals the value of the item minus your outstanding loan balance. Knowing how much equity you have allows you to determine how much you'd be left with if you sold the item and paid off the loan. With an amortized loan, part of each payment goes to paying interest, and part goes to paying off the principal. These portions change over the life of the loan. However, your loan balance isn't the only thing that affects your equity -- you also need to know how much your item is worth. For example, if you take out a car loan, even though you're paying down the loan, if your car's value is dropping at an equal rate, you won't be building any equity.
Calculate the number of payments over the life of the loan by multiplying the number of years it takes to pay off the loan by the number of payments per year. For example, if you take out a five-year car loan and make monthly payments, multiply 5 by 12 to get 60 payments.
Calculate the periodic interest rate on your loan by dividing the annual interest rate by the number of payments per year. In this example, if you're paying 6.6 percent interest each year, divide 0.066 by 12 to get a monthly rate of 0.0055.
Add 1 to the periodic interest rate. In this example, add 1 to the monthly rate of 0.0055 to get 1.0055.
Raise the result of 1 plus the periodic rate to the number of payments over the life of the loan. In this example, raise1.0055 to the 60th power to get 1.389711003.
Raise the result of 1 plus the periodic rate to the number of payments you've made on the loan. In this example, if you've made 24 payments, raise 1.0055 to the 24th power to get 1.140695684.
Subtract the Step 5 result from the Step 4 result. In this example, subtract 1.140695684 from 1.389711003 to get 0.249015319.
Subtract 1 from the Step 4 result. In this example, subtract 1 from 1.389711003 to get 0.389711003.
Divide the Step 6 result by the Step 7 result. In this example, divide 0.249015319 by 0.389711003 to get 0.638974309.
Multiply the result by your original loan amount to find the amount remaining. In this example, if you borrowed $10,000, multiply 0.638974309 by $10,000 to find you still owe $6,389.74 on the loan.
Subtract what you owe on the loan from the value of the item to find your equity. In this example, if the car is worth $7,000, subtract $6,389.74 from $7,000 to find you have $610.26 of equity in the car.
Items you will need
- Scientific calculator
- Ablestock.com/AbleStock.com/Getty Images
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